Blog
Attorney Milena Nowicka
What does converting a Swiss franc loan involve and when can it be done?
Is converting a loan denominated in Swiss francs worthwhile?
Why do banks offer the conversion of Swiss franc loans?
Why is it worth carefully considering the decision to convert a Swiss franc loan?
Conversion vs. de-indexation – are they the same?
Before deciding to convert your loan, consult a lawyer.
In recent years, banks have been eager to offer Swiss franc borrowers the conversion of their CHF loans. At first glance, this may seem like a very attractive solution. Thanks to it, the borrower has a chance to forget once and for all about the fluctuating CHF exchange rate and start repaying the loan in Polish zlotys. But is converting a Swiss franc loan really worthwhile? Unfortunately—not necessarily.
Converting a loan denominated in Swiss francs involves changing the terms of the agreement so that the Swiss franc is replaced by the Polish zloty. The bank makes this conversion based on the current outstanding balance of the loan, using the exchange rate applicable on the day of conversion. From that point on, the loan is no longer linked to the CHF exchange rate and becomes a zloty-denominated loan.
In theory, loan conversion can take place at your request—provided that the bank approves it, you sign an appropriate annex to the agreement, and from then on you repay the loan in zlotys. In practice, however, the vast majority of Swiss franc loan conversions result from the banks’ own initiatives, as they approach borrowers with settlement offers.
At first glance, the prospect of converting a loan may seem tempting. Above all, this solution allows you to forget once and for all about your loan being linked to the CHF exchange rate. After many years of nervously following the rising rate, constant concerns about your financial future, and watching how—despite consistent repayments—your financial situation fails to improve, you may finally regain peace of mind. All the more so because the better settlement offers sometimes even provide for partial forgiveness of the remaining debt.
Moreover, after long years of living in constant anxiety, you probably want to free yourself from the loan as quickly as possible. Entering into a settlement with the bank definitely makes this possible. You can reach an agreement with the bank in as little as a few to several dozen days. You also avoid the need to prepare a lawsuit, gather documents, and attend court hearings, which for most people are extremely stressful.
That is the theory. But at this point it is worth asking yourself: if this solution were really so beneficial, would banks be coming forward with settlement offers on their own—and doing so so frequently and willingly?
Banks are not guided by the interests of Swiss franc borrowers, but above all by their own interests. By entering into a settlement, a bank can avoid the worst possible scenario for itself—namely, the invalidation of the loan agreement. By keeping a defective agreement in force, it avoids serious financial losses. What is more, it can even make money on such a solution. How is that possible?
First, loan conversion entails a change in the interest rate benchmark—from the previous LIBOR (SARON) to WIBOR. We will look at this issue in more detail later in the article. For now, it is worth noting that interest rates based on WIBOR are higher, which translates into greater profits for the bank.
In addition, some banks charge extra fees for converting a Swiss franc loan. And even if they do not, they may find another way to profit—most notably by charging fees for preparing the annex to the agreement.
The greatest benefit for the bank, however, is the certainty that you will not bring the case to court. Entering into a settlement involves waiving the right to pursue any claims in the future. This means that by converting the loan, you give up the chance to have the Swiss franc loan agreement invalidated or de-indexed.
By far the biggest downside of loan conversion is that it closes the door to bringing a court case in the future. If, after some time, you conclude that the settlement you entered into was not favorable to you, you will not be able to reverse that decision.
Loan conversion also involves replacing the existing LIBOR (SARON) benchmark with WIBOR. This benchmark is far less attractive when it comes to determining loan interest rates and may lead to even a doubling of interest. And that is not all—higher interest also means a higher total cost of servicing the debt, which translates into additional profit for the bank and further costs for you.
You should also note that conversion is carried out based on the current selling exchange rates applied by a given bank. These are certainly much higher than at the time the agreement was signed many years earlier. In practice, this may mean that even after conversion, the outstanding loan balance remains very high.
In summary, while converting a Swiss franc loan may free you from the troublesome link to CHF, it does not mean that such a decision is financially advantageous for you.
In the context of Swiss franc loans, two terms related to changing the currency in the agreement often appear. One is the already mentioned conversion, and the other is de-indexation. At first glance, they might seem like synonyms. Unfortunately, many Swiss franc borrowers think so when entering into a settlement with a bank. But how does it look in practice?
De-indexation is connected with the presence of prohibited contractual provisions. If a court determines that such provisions (also known as abusive clauses) are present in your loan agreement, the agreement is interpreted without taking those clauses into account. Since these abusive clauses concern provisions related to the use of CHF exchange rates, interpreting the agreement without them makes it a zloty-denominated loan.
At first glance, the effect seems the same—both result in a conversion of the obligation into zlotys. However, “at first glance” is the key phrase here.
First, loan conversion takes effect from the moment the annex is signed, and therefore applies only to future obligations. De-indexation, on the other hand, takes effect from the moment the agreement was originally concluded. After all, if certain provisions were invalid, they were invalid from the very beginning. This means that the bank must return all amounts you overpaid in previous years under the loan, resulting from your compliance with abusive clauses.
What is more, after de-indexation, the LIBOR benchmark will still apply—the same one that was in force from the beginning of the agreement and, at the same time, more favorable to you. As you already know from the previous sections, the situation is different in the case of conversion—the previous benchmark is replaced by WIBOR.
As you can see, converting a Swiss franc loan is far less beneficial than the narrative presented by banks would suggest. This does not mean that entering into a settlement with a bank is never worthwhile, but it is essential to make sure you understand its consequences.
That is why, before making a final decision, you should analyze all available options and check how your situation would look in the event of loan conversion, de-indexation, or complete invalidation of the agreement. And if you decide that you want to sign a settlement, consult its terms with a lawyer specializing in Swiss franc loan cases.
A lawyer will analyze the conditions proposed by the bank and ensure that they are beneficial to you. If they see an opportunity to improve your situation, they will also negotiate with the bank to introduce more favorable terms. Remember that settlement terms can be negotiated and that you are actually in a stronger position. It is in the bank’s interest to make many concessions, as long as it avoids the invalidation of the agreement. It is worth taking advantage of this and making sure that your interests are properly protected.
