Interest rates are going up. First with the credits

Deposit changes will be delayed

By the end of 2023, interest rates on housing loans in our country may rise to 4-5% and those on consumer loans – to 10%. This forecast is made by financiers based on the hard course of the US Federal Reserve towards cooling lending and controlling inflation, which the European Central Bank is following several months late.

Already a year ago, the Fed began gradually raising key interest rates, recently announcing that by the end of March 2023 their levels will reach around 4.6%. The ECB in July and September also took 0.5 and 0.75 percentage point increases in the refinancing rate, snapping an eight-year run of negative rates, and warned of further hikes in the coming months. Following these actions, central banks in Europe are racing to raise key interest rates.

Because of the currency board, the BNB cannot carry out such actions, but since July, the commercial banks in our country have started to react timidly. Some of the larger financial institutions have taken the first step – removing the punitive fees for large deposits that they had introduced because of excess free cash. UBB, Unicredit Bulbank, Postbank, and KVS Bank (formerly Raiffeisenbank) exempted account owners with over BGN 200,000 from paying a 0.7% annual fee above these amounts.

Other smaller banks recovered interest on savings after going negative, such as Allianz Bulgaria, and some significantly increased yields, such as Investbank, to 1.11% on 12-month deposits.

The new main interest rate announced by the BNB for October is indicative of the reversal of the trend.
For the first time in six years, it is different from zero – 0.49%
The BNB does not determine the OLP but only calculates it using a special methodology based on the index of transactions with overnight deposits in BGN between banks in Bulgaria. This index was a negative value for a long time, but in September, transactions with positive returns were already made, which also led to the change of the OLP.

The monthly statistics of the BNB also show, albeit timidly, an increase in interest rates on deposits. For the first time in more than two years, corporate savings are coming out with a positive average yield. For households, the average interest rate on new deposits grew for the second month in a row to 0.17%, after 0.13% in July.

However, banks are still ultra-liquid, so bolder upward moves in savings rates are unlikely to be seen anytime soon. This is good news for borrowers because the interest on loans largely depends on the interest on deposits.

New applicants for bank loans will be the first to feel the effects of the policy of tightening lending. This is even already visible in consumer loans, where statistics report a slight increase in average interest rates in July and August, and for the first time in half a year, they exceeded 8%.

“The truth is that many banks did not continue their promotional offers and this leads to an increase in the average interest rate on consumer loans,” explained credit consultant Tihomir Toshev. He emphasizes that in reality, the interest rate on consumer bank loans is lower – around 5-6%, while the BNB statistics also include the significantly more expensive quick loans granted by the banks’ specialized subsidiaries.

For the time being, there is no visible change in newly concluded mortgages – at least from the data for July and August.

Since October 1, however, we have been the first bank to announce an increase in housing loan prices for new customers – individuals. This is UBB, which raises the interest rate on mortgages by 0.11 percentage points.

The big question is when will the banks start raising interest rates on loans already taken out?

People paying off fixed-rate bank loans should not have to worry about an upcoming increase. However, the fact is that long-term loans are rarely concluded with a fixed interest rate, or if there is one, it is only valid for the first one to three, at most up to five years of the repayment plan.

Interest on loans in most cases in our country is made up of a floating component and a fixed allowance, which depends on the term of the loans and the risk. Since the BNB stopped determining the SOFIBOR index in 2018, each commercial bank chooses on its own what basis to adjust the floating interest rate on loans and how often to make adjustments.

“Most banks, including all the larger ones, have taken as a basis the average monthly interest rates on deposits, which are announced every month by the BNB. In recent years, they have reached zero, which was the reason for the banks to reduce the interest rates on their customers’ loans. Now the reverse process begins. And if there is no rapid increase in the yield on savings, there should not be a rapid increase in interest rates on loans,” Toshev points out.

Desislava Nikolova is of a similar opinion: “Because of the competition and the still high liquidity, even after the upcoming, third consecutive increase in interest rates by the ECB, the banks in our country will probably hold back the increase in interest rates on loans for a few more months”.

In addition, interest rates will rise smoothly and in steps, while employers are expected to increase wages in response to inflation.

Credit Center accounts show that an interest rate increase of 0.5 percentage points, at the average level of withdrawn home loans of BGN 140,000, will raise the monthly repayment installment by BGN 10-20. However, consumers should expect several such increases within a year or two, as the forecasts are for an increase in interest on housing loans to 4-5%, at the current 2.5%. If the interest rate doubles, the monthly installment would become more expensive by about BGN 130 to BGN 740 with a repayment term of 25-30 years.

“For people with mortgage loans, such an increase in installments will not create major difficulties because, as a rule, they have higher incomes, a stable job or business, with some savings,” commented Toshev.

Greater problems can be expected for consumer loans, where their recipients are more sensitive to rising costs. The average size of the consumer loan is about BGN 15,000 unas, which is repaid over 10 years. If the money is withdrawn at 6% APR and the price rises to 10%, the monthly installment from BGN 167 will jump to nearly BGN 200.

Regarding quick loans, experts do not expect any changes in interest rates, because they are high enough and a new rise will make them uncollectible.

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