Fixed or variable interest rate

Currently, if we want to apply for a mortgage, we have to decide whether we want a fixed or variable interest rate. What does it mean?

A variable interest rate means that we will be paying a loan based on a fixed bank margin and a variable WIBOR – and in the future WIRON. The bank’s margin depends on the current credit policy of each institution offering credit, as well as current trends in the market. What value WIBOR determines depends on more factors. First of all, what is WIBOR? It stands for: Warsaw Interbank Offered Rate, or the benchmark interest rate on loans in the Polish interbank market.

It is determined as the arithmetic average of interest rates quoted by the largest banks operating in Poland, which are participants in the WIBOR panel, after rejecting extreme values. The value of WIBOR depends primarily on the interest rates set by the central bank, in Poland the National Bank of Poland.

The higher the values are, the more WIBOR rates increase. This is because the index must fall between the values of the deposit rate and the lombard rate, which is set by the Monetary Policy Council Banks offer WIBOR 3M and 6M, and the difference between them lies only in
the update period. According to the nomenclature, WIBOR 3M is settled every 3 months, which means that the terms and schedules of loan agreements are updated quarterly for loans based on this indicator, while WIBOR 6M is updated every 6 months.

In the simplest terms, what is currently happening to loan installments, i.e. their large increase, is due to a significant increase in WIBOR.
These values and changes are out of our control, and if we choose this repayment formula we must bear in mind that the installment can and will drop significantly – as in the covid period and increase significantly as is happening now.

As of July 2021. The Financial Supervision Commission introduced a requirement that all banks offering mortgages in Poland offer loans with a fixed or periodically fixed interest rate. Initially, with the low value of the WIBOR index, customers were not interested in this option. Only sudden increases in its value from Q1 2022 began to tip the balance in favor of fixed interest rates, which also began to rise naturally. What does fixed interest rate mean? It is a formula in which the bank offers a loan with a fixed interest rate for a minimum of 5 years.

The customer also has the knowledge of how much his margin will be at the end of this period. He can choose whether to automatically switch to a variable interest rate after 5 years with a known margin and WIBOR value current for the period in the future, or take advantage of another 5-year fixed interest formula offered by the bank. Currently, BNP Paribas is the only bank to offer fixed interest rates even for a 10-year loan term.

We can’t tell which formula is better. Variable interest rates allow you to “line up” to the market, but are risky because it spikes. A fixed interest rate allows you to plan your budget with a guarantee of an unchanging installment, but it may turn out that the value of WIBOR starts to fall and having a fixed installment you start to lose, because you still pay the same amount as those customers who chose a variable interest rate.