Promotional interest loans - a time bomb still ticking in bankers’ portfolios

Bankers granted mortgage loans with promotional interest rates during the lending boom years, set at low levels for only a while after which they become variable, worth 7 billion RON (some 2 billion euros at the exchange rate of the time).

This marketing stunt, however, is backfiring on bankers now, because as interests are reset, the monthly instalment goes up, but with clients already under pressure, many end up falling behind with their payments. What impact might it have? NBR experts have calculated that banks might end up having to provision an additional 75 million RON (almost 21 million euros). The amount is not overwhelming, considering banks have already set up 4 billion euros in provisions, which go up by tens or hundreds of millions of euros every month.

For instance, the monthly instalment of a 40,000-euro mortgage loan, repayable in thirty years, stood at 275 euros, at a 5.75% interest per year. If the interest goes up to 7% a year, the instalment reaches 310 euros or 330 euros at a 8% yearly rate.

Promotional interest rate loans were what drove the US real estate market towards collapse, as many low-income clients were nudged by brokers and helped by banks to buy homes they actually could not afford.

Promotional interest rate loans took off in 2008 when bankers were rushing to gain market share, with the share of such loans in the total new loans granted to consumers reaching 50%, according to NBR's 2009 stability report.