When choosing a mortgage loan, many Poles decide to incur liabilities to the bank in foreign currencies. For many years, loans in Swiss francs were extremely popular.
Indexed and denominated loans are two different currency conversion mechanisms that affect the amount of debt and installments. Your ability to pursue claims against the bank depends on what type of loan you have.
What is an indexed and denominated loan? Simple explanation
Seemingly, an indexed and denominated loan is a very similar form of loan in which the foreign currency plays the main role. In fact, the difference between them is fundamental, which also translates into different financial consequences and different obligations towards the bank.
See also: Record demand for mortgage loans. The cheapest apartments are disappearing from the market
An indexed loan is a type of currency loan whose value is indexed to the foreign currency exchange rate, but is paid and repaid in domestic currency. This means that the loan amount and installments are converted according to the current exchange rate of the foreign currency to which the loan is indexed.
Indexed loan. We explain what it is
As explained by the Credit Information Bureau, in a loan indexed to a foreign currency – e.g. the Swiss franc – the client incurs a liability for a specific amount in PLN. The bank transfers the entire amount in Polish currency, but the debt amount is converted into Swiss francs according to the exchange rate applicable on the day the loan is disbursed.
Throughout the duration of the loan, the bank calculates subsequent installments based on the exchange rate applicable at that time, and the customer repays the installment in Polish zloty. This mechanism can be very risky for borrowers. To such an extent that even after a few years, the amount to be repaid will be higher than on the day the loan was launched.
How is this possible? BIK gives an example: the client incurred a liability of PLN 250,000. PLN, which was indexed to the Swiss franc exchange rate. On the day the liability was launched, the exchange rate could be PLN 2, and therefore the loan itself was supposed to amount to PLN 125,000. CHF. After a few years, the client repaid the equivalent of PLN 50,000. CHF, but at that time the Swiss currency rate increased to PLN 4. As a result, the total remaining amount to be repaid increased to PLN 300,000. zloty.
This is what denominated credit is all about. Not everyone knows the difference
In turn, a denominated loan is a type of loan granted in a foreign currency, but repaid in domestic currency. This means that the loan amount is determined and expressed in a foreign currency (e.g. euro, US dollars, Swiss francs), but the loan installments are repaid in local currency (e.g. Polish zloty).
See also: A mortgage loan without a full-time job? It's possible, but there are conditions
This means that the installments are also converted into Polish zloty, but fluctuations in the foreign currency exchange rate may significantly affect the amount of monthly installments. The Credit Information Bureau gives an example of a loan of PLN 125,000. CHF.
At the exchange rate of PLN 2, the consumer was paid PLN 250,000. PLN loan. However, if in the period from determining the details of the loan agreement to disbursing the loan, the exchange rate increased to e.g. PLN 2.20, then the borrower received PLN 275,000. zloty.
Indexed versus denominated loan. What does this mean for customers?
Both products are susceptible to exchange rate fluctuations, but when indexed, an increase in the currency rate can significantly increase the outstanding balance. In recent years, more and more consumers who took out loans in Swiss francs are filing claims, primarily due to abusive clauses contained in loan agreements.
As BIK explains, Swiss franc borrowers may pursue claims if the contract contains abusive clauses, e.g. regarding the conversion of exchange rates. This applies to both indexed and denominated loans.
See also: Do you have a mortgage? One decision can cost a fortune
An indexed loan differs from a denominated loan mainly in the currency in which the loan amount is determined. The limitation period for claims is 6 years from the date of detection of abusive clauses.
The type of loan itself does not make it invalid – the provisions of the contract decide. Currently, banks no longer offer such loans to people earning in PLN. Before taking action, it is worth consulting a lawyer specializing in foreign currency loans.
