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We knew that the era of historically ultra-low interest rates would eventually end; we just didn’t know that we would be entering the eurozone with a new wave of their increase. Moreover, despite post-crisis deleveraging, we are still quite an indebted nation. Given the decline in standards, it is unlikely that we will rely less on loans in the future. Rather, it will be – more. However, even before inflation and the rise in reference interest rates, banks began offering fixed rates. According to a survey of the largest banks, the majority of loans were contracted with fixed interest rates, thus being less risky.
Specifically, OTP Bank states that clients generally show interest in fixed interest rates. – All cash loans at OTP Bank are contracted with a fixed interest rate. Housing loans are approved with a combination of fixed and variable interest rates. For cash loans, the fixed interest rate applies for the entire repayment period, while for housing loans, the fixed interest rate period is three years. Legal provisions clearly regulate interest rate limits on all types of loans, aiming for a higher level of consumer protection. We certainly recommend that clients approach borrowing rationally in accordance with their financial capabilities and needs. With fixed interest rates, consumers are protected from the risks of variability due to rising reference interest rates and any market changes. When it comes to corporate clients, the bank still offers both interest rate options, with a current predominance of variable interest rate offers for short-term products, while long-term loans continue to be offered with both options. The reason for this is that funding sources for the short term are mostly tied to variable interest rates – they explain at OTP Bank, adding that the arguments for and against both options largely depend on the nature of financing and the amount of risk they are willing to take.
Loans that finance investments and must have predictable returns require predictable interest costs, so they recommend contracting a fixed interest rate. Loans that finance working capital within the cycle are certainly better suited to variable interest costs that follow the duration of the business cycle.
At PBZ, they briefly state that in the part of their business with citizens, the type of interest rate contracted varies depending on the type of loan and the desired repayment period.
– Thus, clients for housing loans with a mortgage can choose whether they want to contract a loan with a combination of fixed interest rates for a period of five or 15 years and variable interest rates with a total repayment period of up to 30 years or contract a fixed interest rate for the entire repayment period for a term of up to 15 years. This year, about 80 percent of housing loans were contracted with a combination of fixed and variable interest rates, while about 20 percent were contracted with a fixed interest rate. The offer of non-purpose loans is exclusively with a fixed interest rate, for a repayment period of up to ten years. In the part of the business with companies, we offer both fixed and variable interest rates, depending on the client’s choice and the purpose of financing as well as the maturity of the loan – they conclude.
Consumers Choose Fixed Rates
From Addiko Bank, they convey that they specialize in quick cash loans for consumers and small entrepreneurs while they have not offered housing loans since January 1, 2020.
– Currently, all loans we contract have a fixed interest rate for the entire duration of the loan. In our total loan portfolio, there is a smaller portion of housing loans that were contracted earlier, which have a variable interest rate. Regarding financing for entrepreneurs, loans with both fixed and variable interest rates are available. Most loans, about 99 percent, this year were approved with a fixed interest rate for the entire repayment period. It is important for clients to understand the difference between fixed and variable interest rates. With fixed interest rates, they will know at all times what it will amount to and there will be no uncertainty about the increase in the burden of loan repayment in case market interest rates rise – they say at Addiko.
At Erste Bank, loans with fixed interest rates also prevail, with 85 percent of cash loans approved with fixed rates. At the same time, 19 percent of housing loans were approved with a fixed interest rate, 52 percent with a combined rate, and 28 percent with a variable interest rate.
– When we talk about the credit portfolio of citizens with a variable interest rate, a larger part is tied to the reference interest rate NRS, and a smaller part to EURIBOR. Cash loans are approved exclusively with a fixed interest rate, which will be further reduced to 4.99 percent from October 20, or 4.49 for cash loans with repayment insurance. Housing loans with a repayment period of up to 10 years are approved with a fixed interest rate currently at 2.8 percent. Housing loans with a repayment period longer than 10 years are approved with a combined interest rate that implies the application of a fixed rate in the first 10 years of repayment and, after the expiration of that period, the application of a variable interest rate until the end of the loan repayment, which represents the sum of 6M NRS1 for EUR and a fixed agreed number of percentage points, which amounts to 2.8 percent. In accordance with the currently valid values of the reference/fixed part, the total interest rate for the client after the expiration of the 10-year period would amount to 2.88 percent – they explain the math at Erste, adding that in the part of the business with companies, all options exist, with a noticeable state that currently 85 percent of approved short-term loans are with a fixed interest rate, while for long-term loans there is a more intense approval of placements with a variable interest rate (58 percent of current exposure).
Zagrebačka Bank also offers cash loans with fixed interest rates for the entire repayment period, while housing loans are approved with fixed interest rates, variable rates, and a combination of fixed and variable interest rates (the interest rate is fixed for the first 5 years). Credit card loans are also with fixed interest rates. – An overview of the product structure shows that clients generally choose credit products with a fixed interest rate that protect consumers from the risk of interest rate changes – they briefly say at Zaba.
From Erste, they add that the interest rate trend is expected. A reduction in regulatory costs resulting from Croatia’s entry into the Eurozone is also expected, and this is one of the components that will have a positive impact on the level of interest rates and generally on credit conditions in Croatia in the medium term.
– Along with other benefits of integration into the monetary union, such as the practical elimination of currency risk and contributing to the reduction of the risk premium, and taking into account the fact that the banking system in Croatia has already been highly liquid for some time, the expected rise in interest rates, especially in relation to some other European countries, should certainly be mitigated to some extent. However, it should be emphasized that, in the short term, the level of interest rates in the upcoming period will predominantly depend on the moves of monetary policy makers in raising reference rates, primarily the European Central Bank, in response to the current environment of high inflation and accompanying uncertainties related to the war conflict in Ukraine. It is important to emphasize that the transmission of the expected rise in reference interest rates is faster for clients with loans tied to EURIBOR, while on the other hand, the widespread use of NRS in forming interest rates reduces exposure to interest rate risk, meaning that the increase in the repayment burden will be gradual and with a time lag in accordance with the nature of determining the NRS rate. Generally speaking, Erste Bank currently has no plans to raise interest rates on newly approved loans – they convey from Erste.
Protect Yourself from Rising Interest Rates
They add that the advice or suggestion to clients, primarily those who use loans with a contracted variable interest rate, is to focus more on protection against potential increases, or to analyze the available options at their disposal. They say that Erste Bank has long offered the possibility of changing the type of interest rate from variable to fixed or combined interest rate. This is a simple procedure that involves signing an annex to the contract and its solemnization. They note that any change of interest rate from variable to fixed or combined is an individual decision of each individual loan user made based on their own assessment of the long-term profitability of such a step.
– Namely, by choosing a fixed interest rate, clients have the opportunity to protect themselves from the risk of possible increases in reference interest rates in the future, or to secure themselves from the potential impact of such movements on the level of the interest rate. On the other hand, clients who continue to use a variable interest rate during the loan repayment will still bear part of the risk of its possible increase in the future, although it may be lower at times compared to fixed. In order to ensure against a potential rise in the reference interest rate in the future, the bank recently began sending personal notifications to all clients, users of housing loans with a variable interest rate tied to EURIBOR, in which the possibility of changing the interest rate is detailed. Clients were offered a change in the interest rate at currently valid interest rates. All clients who have loans with a variable interest rate, regardless of the type of loan, and who have not yet received a letter, have the option to request a change of that type of rate to fixed or combined, if at that moment the bank has those types of interest rates in its loan offer – they conclude.
Financial advisor Vesna Ciganek Vuković adds that fixing interest rates for long-term placements is common when interest rates are at high levels to reduce the risk of potential disruptions in the long term, so interest from companies in fixed rates has been increasing since 2020.
– The current rise is conditioned by the rise in reference interest rates. Due to the crisis, macroeconomic and social indicators, wages, and employment may deteriorate, which consequently leads to an increase in credit risk, indirectly to an increase in the risk premium, or an increase in interest margins, which may lead to further increases in interest rates. However, in that case, central banks can again react by lowering reference rates. Fixed rates are nominally higher than the current total variable rates, as the creditor assumes the risk of a potential increase, but in the long run, that difference can go in both directions. In uncertain conditions, fixed interest rates still provide a certain level of security and peace of mind regarding the amount of the loan installment; for example, in the offer of mortgage loans, fixed rate options are offered for periods of three to ten years, after which it is variable, but that is a sufficient period to cover the crisis and uncertainty – concludes the interlocutor.
