More and more often we can hear about the conversion of the loan. What is it about and is it worth deciding on it?
Anyone with a franc loan probably remembers Black Thursday 2015. It was mid-January when we could see a significant increase in the CHF rate. We heard disturbing forecasts for the future from the media, politicians calmed us down and made promises, but we are the ones who are paying back the ever-increasing loan installment.
Nice bad beginnings
For about two years, we’ve been bombarded with information about francis. Protests on the streets or new bills that really do not add anything – this is the everyday life of people in debt in francis. The worst situation concerns debtors who decided to take out a loan in 2008. At the time, the franc exchange rate was at around $ 2 – then nobody predicted that it would change radically in the next few years.
Franchisees forced to pay higher loan installments have the opportunity to convert their debt. Banks are preparing special offers for indebted people, promising that the installment will not change. Is it really beneficial for us?
When do we think about currency conversion of a loan and what does it consist of?
The idea of loan conversion always appears when the exchange rate of the Polish zloty weakens, but other currencies strengthen. This situation means that bank customers who have taken out a loan in a foreign currency have much higher amounts to repay than they originally expected. In recent years, Poles have decided to take out loans in francis, so let this currency set an example for us.
Currency conversion is the conversion of the amount of money borrowed from the bank from the currency in which the debt was incurred into another currency.
We can distinguish two types of foreign currency loans. The real foreign currency loan is in a foreign currency and is repaid in that currency. The second type of foreign currency loan is a denominated loan. This type of loan is also granted by the bank in a foreign currency, while the loan tranches and installments are converted into USD according to the exchange rate applicable on the day of repayment.
Currency conversion fee
Unfortunately, banks have the right to charge us a commission for converting a loan. The amount of commission depends on the bank’s internal arrangements, but it is usually a percentage value of debt, e.g. 1% or 1.5% of the amount of the liability. In addition to the commission, we can also expect additional costs.
If not currency conversion then what?
In any case, when we do not want to convert our liability to the bank or we simply do not have such a possibility, there are other ways to reduce the constantly growing loan installment.
First, we can try to change the duration of the loan, but this option applies only to those who have taken a loan for less than 30 years. If our loan was originally to last 30-35 years, negotiations with the bank will be very difficult, and a positive decision of the bank may even be impossible.
The second way, which is much more realistic to do, is to buy francis at a lower rate and pay the installment in a foreign currency, not in dollars. Current law says that banks must enable us to repay this loan. In this way, we can reduce the loan installment by up to several hundred dollars, if we take the time to find an exchange office with the lowest franc rate.
Is it worth to convert your mortgage
The currency conversion operation is profitable only when the foreign currency exchange rate is low and the Polish zloty is strong, assuming that the currency of the loan will gradually strengthen. Unfortunately, we often decide to convert currency at a time when the currency of our loan has increased compared to the exchange rate of the zloty, and thus we do not gain from the operation and we lose a lot.
We must also be aware that submitting the application for currency conversion of the loan will probably be associated with other new conditions of the contract – a new margin, additional insurance or security may be introduced. In our previous entry you can check What the loan agreement should contain .
When converting the loan, we must remember that the amount of capital that remains to be repaid will be converted into USD at the current exchange rate and on Polish conditions, i.e. WIBOR and loan margin in USD. How do you put it in numbers? If the interest rate on the loan in CHF is 0.56%, then after currency conversion it will be about 3.65% – this is a very big difference.
On the other hand, if we decide to convert the loan, we will not be able to take advantage of a possible drop in the franc’s price. Considering the fact that the WIBOR 3M value will rather increase, the installment of our loan will also increase.
We may wonder, to some value the franc exchange rate would have to increase so that the conversion operation with the above parameters would pay off. It has been calculated that the CHF course would have to be $ 5.62 – we have to answer the question ourselves whether this course is possible …
Currency conversion of the loan is a good solution only for people who are tired of fears and fears related to currency risk. Anyone who wants to get rid of these feelings can agree to the disadvantages described above.