Published: November 30 2023
The Hungarian government has decided to extend the interest rate cap on loans for small and medium-sized businesses until April 1, 2024. Additionally, the interest rate cap on consumer loans and student loans will remain until July 1, 2024. Borrowers who have received notification from their banks about the expiration of the interest rate cap should disregard it.
Purpose and Function of the Interest Rate Cap
The purpose of the interest rate cap is to prevent a drastic increase in loan repayments for the most vulnerable loans that are exposed to interest rate risks. By using a real-life example of a variable-rate mortgage loan, experts demonstrate the impact of the interest rate cap.
Example of the Interest Rate Cap's Impact
The experts at Bankmonitor analyzed the impact of the interest rate cap on a mortgage loan with a remaining balance of 6 million Hungarian Forints, a remaining term of 12 years, and a fixed interest rate spread of 3%. With the interest rate cap, the current interest rate is 5.02% and the monthly repayment is 55,500 Hungarian Forints.
Without the interest rate cap, based on the current value of the 3-month BUBOR rate (10.70%), the interest rate would be 13.70%, resulting in a monthly repayment of 85,100 Hungarian Forints. It should be noted that the impact of the interest rate cap varies depending on the interest rate spread, remaining balance, and remaining term of each individual loan.
Comparison to Previous BUBOR Rates
The current value of the 3-month BUBOR rate is significantly lower compared to its rate in the past. Last fall, the BUBOR rate was above 16%, which, combined with a 3% interest rate spread, could have resulted in monthly repayments exceeding 100,000 Hungarian Forints without government intervention.
Conclusion
The extension of the interest rate cap provides borrowers with continued protection against drastic increases in loan repayments. However, it is important to consider the impact of future changes in interest rates and other factors when planning personal finances or business strategies.
Questions & Answers
What is the purpose of the extended interest rate cap in Budapest? The extended interest rate cap aims to prevent drastic increases in loan installments for the most vulnerable loans that are exposed to interest rate risks due to changes in market yields.
How long will the interest rate cap for small and medium-sized businesses in Hungary be extended? The interest rate cap for small and medium-sized businesses will be extended until April 1, 2024.
How long will the interest rate cap for residential loans and student loans in Hungary be extended? The interest rate cap for residential loans and student loans will be extended until July 1, 2024.
What should borrowers do if they receive a notification letter from their bank stating that the interest rate cap will be lifted in January 2024? Borrowers should ignore the notification letter and not worry about the changes in the interest rate they will have to pay after the expiration of the interest rate cap.
How does the interest rate cap affect monthly loan repayments? To understand the impact of the interest rate cap removal on monthly repayments, it is essential to be familiar with the purpose and operation of the interest rate cap. The interest rate on loans consists of a reference rate and a margin. The reference rate, typically the 3-month Budapest Interbank Offered Rate (BUBOR), can fluctuate based on the current value of the rate.
Can you provide an example of the impact of the interest rate cap on a variable rate mortgage in Hungary? Suppose a loan has a current balance of 6 million Hungarian Forint, a remaining term of 12 years, and a fixed margin of 3%. With the interest rate cap in effect, the loan's current interest rate would be 5.02%, resulting in a monthly repayment of 55,500 Hungarian Forint.
What would be the interest rate and monthly repayment without the interest rate cap? Without the interest rate cap, assuming a BUBOR rate of 10.70% on November 30, 2023, the loan's interest rate would be 13.70%. This would require a monthly repayment of 85,100 Hungarian Forint.
How does the current BUBOR rate compare to the past? It is worth noting that when the BUBOR rate was 2.02% on October 27, 2021, the central bank base rate was 1.8%. Currently, even after gradual reductions, the BUBOR rate stands at 11.5%.
Does the impact of the interest rate cap vary for different loans? The impact of the interest rate cap can vary significantly depending on the loan's margin, remaining balance, and remaining term.
