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Foreign Currency Mortgages in Hungary
 

How does the new legislation change your position?

 

Position - Image Credit:Creative Commons – Barney MossImage Credit:Creative Commons Barney Moss

 
   The Hungarian government has taken several steps to improve the position of the people that have taken foreign currency mortgages to finance their homes/real estate investments, and have suffered significant losses due to the devaluation of the Hungarian currency (HUF).  

     Previous attempts to resolve the situation brought partial success and left a large array of clients out of the schemes – especially lower income debtors. At the same time the government had declared that its goal is to find an ultimate solution that is providing help for all borrowers, and by removing this long pending issue, opens the possibility of new start or reboot of local mortgage financing.

     Previously FX borrowers had a chance to repay their loans in full at a preferential rate (in case of CHF the discount was around 30%). As this option was open for a rather short period, actually only provided an opportunity to those debtors that had sufficient funds to raise the cash quickly.

    To provide assistance to those that are suffering from the ever changing exchange rates and subsequently changing instalments another scheme was also offered whereby repayment took place at a fixed rate, and the differentials were charged to an escrow account. This accrued difference was supposed to be charged to the borrower at the end of the term of the original mortgage, with subsidised interests.


What is the new plan and how does it affect the borrowers?


There are three elements of the new scheme:

 

SETTLEMENT

 

    The repayment of the bid-offer spread. Banks in most cases provided the foreign currency denominated loans in HUF, converted on the bid rate of the currency. However when the client paid back the instalments also in HUF, they charged the offer rate thus making a margin on buying and selling the currency. This practice was ruled illegal by the Supreme Court therefore the Banks are obliged to calculate the margin they charged and write it off the principal of the outstanding mortgage.

 

    The repayment of the unfairly charged interest. Previous court cases proved that in some cases banks have changed the interest on the outstanding mortgages without keeping the framework of the actual mortgage contract, their General Terms and Conditions or other regulations. These interest rate hikes were ruled unlawful, and are to be credited back to the mortgage holders. This ruling has been challenged by most banks and they had the possibility to prove whether or not they applied the rules correctly. As there are many banks with different products with different terms the actual amount varies substantially not only bank to bank but also client to client.
 

FIXING THE INTEREST RATE SCHEME

    This regulation applies to contracts signed between 1 May 2004 and 27 July 2014 and is still valid on 1 February 2015. The main purpose of these rules is to bring transparency to a somewhat chaotic and controversial interest rate regimes applied by the Banks. Most of these contracts with variable interest rates, had no reference or base rates and changes were more or less discretionary.

 

  • According to the new regulations contracts can have 3, 4 or 5 years interest periods depending on their actual time to maturity.
     

  • Additional fees, commissions can only be changed once a year and by no more than the rate of Consumer Price Index (CPI)
     

  • All floating rate loans will have a standard reference rate (BUBOR) as detailed below.

 

CONVERSION OF OUTSTANDING FOREIGN CURRENCY LOANS TO HUNGARIAN FORINTS.

 

    In order to protect the borrowers from the long term adverse effects of the foreign currency fluctuations all the outstanding loans will have to be converted to HUF at a fixed rate. This regulation shall apply to outstanding contracts and only in a limited number of cases will the clients a right to keep the original denomination of the loan - proof of foreign earned income will be one exemption for example.

The conversion takes place at the following rates:
 

  • Swiss franc (CHF) at 256.47 HUF
     

  • Euro (EUR) at 308.97 HUF
     

  • Japanese yen (JPN) at 2.163 HUF

 

    The new HUF loans’ interest rate is based on the 3 months BUBOR (Budapest Interbank offered rate) and can have a spread of 2-7%.
 

    All the above changes will take place automatically, the banks will have to notify their clients but the clients’ involvement is not required. However in some cases, if the contract is under foreclosure, has been sold to a debt retrieval agency or terminated the client may be required to apply for the settlement.
 

    In any case due to communication problems with banks we recommend that in case of any doubt you seek local assistance. For our clients we do offer help in clarifying their positions and sorting out differences. If you are not presently a client of Bradley Edwards and Assoc. we urge you to contact us.

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