An essential aspect of the current environment of low or even negative interest rates is the awareness of interest rate risk arising from financial receivables and liabilities, especially – in the case of credit liabilities – the risk of an increase in interest rates on loans, resulting in higher loan instalments.

The market offers loans with a floating rate, fixed rate and periodically fixed rate (according to Recommendation S of 2019), characterised by various levels of interest rate risk. Your income does not depend on market interest rates so loans with a floating rate are the riskiest ones.

Before you contract a loan, apply long-term thinking

Remember! A floating rate is a major determinant of the actual loan instalment. Read all terms of the loan agreement carefully and perform a simulation of loan instalments corresponding to various levels of the interest rate. Make sure that you can repay the loan even when interest rates go up.

How can you calculate your loan instalment and prepare your repayment schedule? You can use the tips provided in the UKNF’s publication titled Interest rate risk for clients of financial institutions. What you need know when using loans and deposits.

Read all the details regarding the loan

Under the Act on consumer credit and the Act on mortgage credit and supervision of mortgage credit intermediaries and agents, the bank should provide you with full information, in particular: the type and amount of the interest rate, the total amount of the loan, the total amount to be repaid and the actual annual interest rate (PL: RRSO), which takes into account all costs.

Read the loan agreement before signing

Remember! Before entering into the agreement, read it carefully and make sure you understand all its conditions, in particular:

− the interest rate, including the margin for loans with a floating interest rate,

− the commission and other additional costs,

− the conditions for early repayment,

− the conditions for switching to a floating rate when the period of the fixed rate comes to an end, in the case of loans with a periodically fixed rate.

A lower interest rate does not always mean a better loan.

Make sure you understand the risk factors involved in the loan offered to you

The bank should inform you about all the risk factors involved in the loan being offered to you. For mortgage-backed loans with a floating rate, the bank should provide a simulation of the loan costs for each level of the reference rate, i.e. 3%, 5% and 10%, as well as for the current interest rate increased by 4 percentage points.

According to the KNF’s Recommendation T, when entering into an agreement for a retail loan, the bank should ask you for, and you should provide, a statement that you are aware of the risk arising from the credit liability you are assuming. According to the KNF’s Recommendation S of 2019, when contracting a mortgage-backed loan with a floating interest rate or a periodically fixed interest rate, you will have to sign a statement that you have been informed by the bank that you bear – and you are aware that you bear – interest rate risk.

interest rate or a periodically fixed interest rate, you will have to sign a statement that you have been informed by the bank that you bear – and you are aware that you bear – interest rate risk.

Choose the interest rate of a mortgage-backed loan that is right for you

According to the KNF’s Recommendation S of 2019, banks’ offer of mortgage loans secured by residential real estate for retail clients should include mortgage-backed loans bearing a fixed interest rate or a periodically fixed interest rate. Moreover, banks should allow clients to change the form of interest rate from a floating rate to a fixed or periodically fixed interest rate, including in the case of loan agreements concluded prior to the effective date of the KNF’s Recommendation S of 2019.

Remember! Before choosing the offer, read proposed conditions carefully: 

− the interest rate being offered (compared to the market rates for similar floating-rate loans),

− the interest rate calculation method applied when converting the loan into a floating-rate loan after the expiry of the period of the fixed rate (in the case of loans with a periodically fixed interest rate),

− additional costs, e.g. in the case of early repayment.

Publication on interest rate risk