You have applied for a mortgage and are you waiting for the bank’s decision? Try to sign the contract by December 17, otherwise, the bank may request a new loan application and start the procedure again.
On December 18, a new law enters into force, which brings our law into line with the 2008 EU directive on consumer credit agreements. The regulations governing the granting of this type of loan have been significantly expanded.
All costs on the candle holder
Borrowers who apply after December 17, regardless of which bank they choose, should receive comparable information on the offer. What’s more, they must receive them on a special form, the template of which is precisely defined in the Act. Different loans have different types of forms.
For example, the form for the mortgage liability includes information on the loan amount, repayment rules, type of collateral, all costs borne by the borrower, interest rate and principles according to which it is calculated, as well as the situation in which the bank may change the conditions specified in the contract or, finally, the consequences to be borne by the borrower when the installment is late.
A uniform form template, applicable in all banks, is to help borrowers compare offers. The customer will receive it before signing the contract. The act also specified elements that should be included in the mortgage contract.
Swirling around the definition of credit cost
Unexpectedly big consequences for borrowers also have the part of the act in which the glossary of terms is included. There are two definitions exactly: the total cost of the loan and the total amount of the loan.
The first concept covers interest, commissions, margins and additional costs (e.g. insurance) except for notary fees. The second term means the total amount that the bank makes available to the customer under the loan agreement. This is where the interpretation problem arises – can the commission that is credited by the bank be added to the loan amount?
Resolving this issue is very important because commission lending by banks is a common practice. This solution increases the actual cost of the commission (because interest is charged on it), but causes that the borrower does not have to bear this burden in cash.
According to Good Finance, adding a commission to the loan amount, i.e. de facto crediting it, is possible under the new law, but only if the commission does not bear interest as the rest of the loan. The Foundation for Mortgage Loans disagrees with the opinion of Good Finance. It indicates, among others, that adding a commission to the loan amount without interest would de facto mean that the bank would grant a free loan, for example for several years.
The Foundation also warns that the above interpretation may lead banks to try to circumvent the rules, for example, granting an additional (more expensive) loan to finance commissions or compensating for lost interest with a higher margin for the remaining part of the loan. And that would undermine the sense of the new consumer credit law.
If we were to accept the Good Finance interpretation on the one hand, and on the other restrictively assume that the Act applies in its entirety to mortgage loans up to USD 255,000. USD, the interpretation of the antitrust authority would have serious consequences for borrowers.
The average commission
For such a loan is 250,000. USD is currently 0.8% – according to Good Credit data. However, the differences in the offer are significant.
In the case of loans in USD, roughly half of the banks do not charge any commission at all, but there are also 2%, 2.5% and even above 3% rates on the market. Very often the borrower has the choice – for example, between a lower commission and a lower margin, or between paying a commission and buying another product offered by the bank (e.g. insurance).
For example, a 3% commission on a 250,000 loan USD is 7,500 USD. Theoretically, such an expense would have to be borne by the borrower in cash if the bank could not add the commission to the loan amount under such conditions as at present. There is no agreement among banks on how to understand the Act in this part.
Other important changes that were included in the act relating to the extension from 10 to 14 days, during which the borrower may, without giving any reason, withdraw from a compact consumer loan agreement. It is worth noting that the new law imposes many obligations on credit brokers, including the need to inform the borrower that the broker is being paid by the bank.