Hungarian mortgage borrowers in hot water

The Hungarian central bank’s tightening cycle, the most aggressive in the European Union, has led to an increase in loan repayment obligations last seen in the 2008 financial crisis. Once the government’s interest rate stop on retail loans runs out at the end of June, hundreds of thousands of Hungarian families will experience a jump of more than 30% in loan servicing burdens.

The majority of housing loans already taken out are protected from rising interest rates by a fixed interest rate or the interest rate stop scheme implemented by the government. However, this is not the case for the new loans currently being taken out where the average interest rate is approaching 6%. Over the past year, the total amount to be repaid for a newly taken out HUF 20 million housing loan increased by HUF 6 million and monthly installments jumped by 20-23%.
The majority of mortgage borrowers, in other words everyone except for families raising at least 2 children or those who are entitled to the government-sponsored CSOK scheme, are faced with rising interest rates on their loans. Over the past year, the interest rate on a HUF 20 million housing loan has nearly doubled.

Interest rate environment
The National Bank of Hungary is in the midst of an aggressive tightening cycle as it seeks to combat rampant inflation and the economic fallout caused by Russia’s invasion of Ukraine. At its latest policy meeting, the Monetary Council raised the benchmark interest rate by 100 basis points and a few day later it hiked the key one-week deposit rate by 30 basis points to 6.15%.
As a result of the series of rate hikes carried out by the central bank market expectations for further tightening, interbank interest rates rose to levels not seen for almost 10 years. The 3-month BUBOR rate, which is the key benchmark for floating-rate loans, rose to 6.46%, the 6-month BUBOR rate to 6.76% and the 12-month rate to 6.87% by the end of last week.
The higher interest rate environment is punishing the small and medium-size enterprise sector primarily, as retail customers with floating-rate mortgages are protected by the interest rate stop introduced on January 1, so they have not yet faced higher repayments in line with BUBOR's rise. Due to the interest rate stop, introduced to tamper the impact of the coronavirus crisis on borrowers, a mere 20% of the recent interest rate increases is felt by borrowers directly. The government decree on the interest rate stop essentially ties mortgage repayments to interbank rates recorded at the end of last October.
According to calculations by financial portal Portfolio.hu, loan repayment obligations would have increased by 15-69% as a result of the jump in interbank rates, monthly installments actually increased only by 3-14% due to the interest rate stop. The calculations included all types of housing loans with maturities ranging from 5 years to 25 years. The median remaining maturity of floating-rate mortgages is around 7 years, which means that the increase in installments over a year on the basis of interbank interest rates would be about 20% on average under market circumstances. However, the interest rate stop moderates this increase to 4-5%, meaning that borrowers have so far been shielded from the impact of higher borrowing costs.

Dim prospects
Once the government’s interest rate stop is phased out at the end of June 2022, hundreds of thousand of Hungarian households will lose their financial shield and will be directly impacted by the massive rise in interest rates. The impact will not be immediate as banks will only be able to adjust the interest rate on outstanding loans at fixed dates (every 3,6, or 12 months – depending on the type of loan). Borrowers may tamper their interest rate-related risks by switching to loans with short interest rate periods.
Given that housing loans are set to become increasingly expensive going forward, it would make sense for mortgage holders to refinance their existing loans or switch to loans with a fixed interest rate for the remaining of the maturity.
The central bank issued a recommendation in April 2019, urging borrowers to opt for fixed-rate loans and commercial banks provided ample information about the potential benefits of such loans. Nevertheless, only 6.5% of eligible mortgage contracts had been converted into fixed-rate products by June 2021. Even though the debt-to-income ratio of Hungarian households is low overall, the income situation of many borrowers has deteriorated in recent years. They stand a high risk of being unable to service their debt once interest rates on their loan return to their actual market level.