How to minimize the Polish mortgage cost?

When signing the mortgage agreement with a Polish bank, you agree on multiple conditions, including the estimated total cost of the mortgage. Does it mean that you are obligated to repay the specified amount to the bank? No, it doesn't, and we will show you multiple methods of cutting the mortgage cost available in Poland.

Method 1 - regular overpayments mixed with lowering mortgage installment

Generally, when making any overpayment of the mortgage in Poland, you have a choice of how this overpayment will affect the shape of your mortgage in the future. You can decide to either lower the monthly installment while keeping the original mortgage period or cut the mortgage tenure while paying the same installment as before. For the first method, we will discuss the former option.

The model we assume for all calculations in this article is as follows:

• Starting yearly interest rate - 6%
• Starting mortgage amount – 500 thousand PLN
• Original mortgage period – 360 months
• Original monthly installment – 2997,75 PLN
• Original cost of interest (assuming the customer is not making any overpayments over 30 year period, and also interest rate does not change over this period) - 579190,95 PLN
   

Now, if we establish you would be making an extra payment on top of the standard installment, it would bring you savings as per below:

1. 500 PLN every month - the total interest cost would become 482372,22 PLN, meaning saving 96818,73 PLN, monthly installment would be lower by 3 PLN after each extra payment, and the total mortgage period would get shorter by 3 months (as you paid up the principal faster than signed in the agreement)
2. 1000 PLN every month - the total interest cost would become 388249,03 PLN, meaning saving 190941,92 PLN, monthly installment would be lower by 6 PLN after each extra payment, and the mortgage period would get shorter by 45 months
3. 1500 PLN every month - the total interest cost would become 310664,59 PLN, meaning saving 268526,36 PLN, monthly installment would be lower by 9 PLN after each extra payment, and the total mortgage period would get shorter by 104 months

Method 2 - regular overpayments mixed with cutting the mortgage period

The model remains the same as in Method 1; however, in this scenario, you keep the monthly installment as it was and instead ask the bank to shorten the mortgage tenure each time you make an overpayment.

Important to note! Some banks charge customers for annex anytime a customer makes an overpayment and asks to shorten a mortgage period rather than have the installment lowered. As of today, these banks are:

• BNP – 200 PLN
• PKO BP – 0,5% from principal left (min. 300 PLN)
• Velo – 200 PLN
   

Now, let's calculate your savings using the numbers we used in method 1:

1. 500 PLN every month - the total interest cost would become 379689,68 PLN, meaning saving 199501,27 PLN, and the total mortgage period would get shorter by 108 months
2. 1000 PLN every month - the total interest cost would become 286934,13 PLN, meaning saving 292256,82 PLN, and the total mortgage period would get shorter by 163 months
3. 1500 PLN every month - the total interest cost would become 231860,57 PLN, meaning saving 347330,38 PLN, and the total mortgage period would get shorter by 197 months

As you can see, this method of regular overpayments gives a better outcome than the first one.

Method 3 - one-time overpayment

Not everyone has the means for regular overpayments or is charged for annex by their bank, and they might prefer to overpay less regularly whenever possible. It is also an option, and we will now analyze a few scenarios around it.

Scenario 3.1 - 50000 PLN overpayment after 1 year of mortgage running

Let's break down the results of such overpayment between the two methods presented above (meaning you either choose to lower the monthly installment as a result of the overpayment or to cut the mortgage period):

• Method 1 - the total interest cost would become 523572,14 PLN, meaning saving 55618,81 PLN, the monthly installment would fall to 2697,98 PLN (from the original 2997,75 PLN), and the total mortgage period would remain intact
• Method 2 - the total interest cost would become 396373,73 PLN, meaning saving 182817,22 PLN, installment would remain the same, and the total mortgage period would get shorter by 77 months
   

Scenario 3.2 - 10000 PLN overpayment every year for 10 years straight

• Method 1 - the total interest cost would become 487891,07 PLN, meaning saving 91299,88 PLN, the monthly installment would fall by around 30 PLN with each 10k repayment, and the total mortgage period would remain intact
• Method 2 - the total interest cost would become 348533,80 PLN, meaning saving 230657,15 PLN, installment would remain the same, and the total mortgage period would get shorter by 110 months
   

Method 4 – interest rate management

You should now understand the mechanisms behind overpaying the mortgage. However, there is more you can do to minimize the cost of your liability – for example, choosing the correct interest rate type.

Generally, in Poland, you have a choice between two types of mortgage interest rates: variable and adjustable.

• The variable rate consists of WIBOR (1M, 3M, 6M, or 12M – depending on the bank and your agreement) and a fixed bank margin. Due to its structure, this rate is subject to continuous fluctuations (which you can see on WIBOR's historical charts).
• The adjustable rate, on the other hand, is fixed for 5 years (or 10 in one bank), meaning that regardless of what happens to WIBOR – your rate remains the same. Subsequently, once five years have passed, the bank will offer a new rate for the next 5-year period (assuming your overall mortgage period exceeds this timeframe). If you do not agree to the offered rate, your mortgage will automatically convert to a variable rate available at that time.

Now, let's talk numbers. At the moment of writing this article, the variable rate starts at around 7% and the adjustable rate – at around 6%. However, before the COVID crisis, when WIBOR in Poland remained below 2% for almost five years straight, the situation was different – variable rates were around 1% lower than the adjustable ones offered by banks.

Important to note! In Poland, banks must follow a regulation set by the Financial Supervision Authority (KNF): a customer with a mortgage based on an adjustable rate can switch the mortgage only to another adjustable rate, while a variable rate can be amended at any moment to either a variable or adjustable one. This rule will become a crucial factor in the following chapter of this article – refinancing.

Method 5 – refinancing

In many cases, transferring the mortgage from one bank to another is an efficient strategy to minimize costs, especially during periods when interest rates are gradually decreasing (which is hopefully the current period). The reason for this is that when the Monetary Policy Council lowers the interest rate, banks follow up by trimming their offers on adjustable-rate mortgages. However, ongoing mortgages keep the same adjustable rate they were signed with, and banks are usually not willing to negotiate the originally agreed rate. Does it mean you are tied to paying for your mortgage more than you could? No, you can cut the cost by moving to another bank.

Before we provide you with promising calculations, let's discuss a few rules important for refinancing:

1. You cannot refinance a mortgage while the property is still in construction, meaning that in case you buy from the developer, you are tied with the taken mortgage until they finish construction and release the property to you.
2. It is not possible to refinance within the same bank, each time you refinance it will mean changing the bank of your mortgage.
3. Some banks charge a fee for early repayment of the mortgage, so it is crucial to check your mortgage agreement before refinancing to avoid unpleasant surprises.

Additionally, refinancing comes with several one-time costs, which differ depending on a bank and your specific case, however, every time you plan to refinance you need to understand which costs will apply to you, and take them into account when calculating your savings coming from the refinancing. The costs may be:

• Property appraisal - around 500 PLN (however, if you paid for the independent appraisal when taking the mortgage, and then refinance again within a year, in many banks you can use the same report, avoiding this cost).
• Court fees - 450 PLN, paid each time you change banks, so the court updates the property register with the name of the new bank.
• Certificate of the mortgage from a current bank - 50 PLN (this document is required by the bank you transfer your mortgage to, however, only a few banks charge customers for it).
• Sworn translation - around 200 per hour (some banks require the presence of a sworn translator when you sign the mortgage agreement with them).
   

Now let's calculate potential savings based on the same model we used for all previous calculations, so 500 thousand PLN taken for 30 years:

1. The customer switches from 8% in the current bank to 6% in the new bank - this way they cut the original interest cost of 820775,2 PLN by 241,584,25 PLN, leaving them with an interest cost of 579190,95 PLN. At the same time, their monthly installment falls from 3668,82 to 2997,75 PLN.
2. The customer switches from 7% in the current bank to 6% in the new bank - this way they cut the original interest cost of 697543,6 PLN by 118352,65 PLN, leaving them with an interest cost of 579190,95 PLN. At the same time, their monthly installment falls from 3326,51 to 2997,75 PLN.
3. The customer switches from 6,5% in the current bank to 6% in the new bank - this way they cut the original interest cost of 637722,4 PLN by 58531,45 PLN, leaving them with an interest cost of 579190,95 PLN. At the same time, their monthly installment falls from 3160,34 to 2997,75 PLN.
    

As you probably noticed by looking at the above numbers, whether the refinancing makes sense in your case requires a detailed calculation covering all the one-time costs, and the potential savings. Please remember that we can help you both with calculating all of the above and also fully manage the transfer of your mortgage.

We hope the article will help you manage the cost of your mortgage more efficiently. Should you have any further questions - do not hesitate to email us at office@loan-brokers.pl

Best regards,

Loan-brokers.pl Team

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