Releasing the Swiss franc rate – and the its resulting rapid growth – is a very negative phenomenon as far as the borrowers with debt in this currency. However, this surprising move by the Swiss National Bank was accompanied by a cut in interest rate, which could mean that for some borrowers with credits in Swiss francs the final balance of recent developments may prove positive.
Interest rates depend on two factors: the market interest rate (in the case of the Swiss franc – LIBOR) and the bank’s fixed margin. In most credit contracts interest rates are calculated by adding up Libor and margin. However, in recent weeks LIBOR remains negative and the recent interest rate cut by as much as 0.5 percent should contribute to further decrease. Most banks did not expect such a situation.
Does that mean that some will pay negative or significantly reduced interest rates? One cannot exclude such a possibility – it depends on how banks interpret the situation and how particular contracts are formulated. The contracts have to be respected, so if some of them state – without any exemptions and reservation – that the interest rate equals the sum of LIBOR and margin, a negative market interest rate will most likely lower the total.
Many credit contracts do not have high margins – it is not unusual for them to be lower than 1 percentage point. Thus, negative interest rates appear to be quite a real possibility. If the negative LIBOR value is bigger than the margin, the interest rates should be negative. This does not mean that the bank should pay the client, as mortgage installments consist of a capital component apart from the interest component. However, this would still mean that the client pays less than what would result from the real estate price alone – so the bank would in a way contribute to its clients housing.
What actually happens depends on how the financial market behaves when shaping the LIBOR rate and on further actions undertaken by the Swiss National Bank – which could soon decide to continue cutting interest rates – as well as on the actions of banks and their clients and the manner in which contractual regulations will be interpreted by lawyers. Regardless of what comes next one can already say that we are dealing with an extraordinary situation which nobody would even consider a possibility few years ago.
Łukasz Kozłowski, expert of Employers of Poland