Housing loans in Bulgaria rank among the EU’s cheapest

The effect seen in the last six months has been a relatively pro-cyclical softening of the effects of the ECB's tightening. It also brought a strange moment when newly concluded mortgage loans in Bulgaria appeared to be among the cheapest in the EU.

How did this happen?

After the ECB raised its deposit rate to 0% and the BNB followed suit by raising its rate on banks' excess reserves from minus 0.7% to 0%, the BNB then kept it at that level. Thus, at the moment, a kind of a differential has formed between interest rates in Bulgaria and those in the eurozone. Bankers in Sofia do not get any income from ample liquidity, unlike their colleagues in Paris, Milan, or even Zagreb. At first glance it seems that, unlike central bankers in the rest of the world, the BNB has given up on fighting inflation and instead is still betting on an expansionary monetary policy. And for now, interest rates on deposits and loans, which are practically unchanged from record lows, seem to confirm this.

If the BNB wants to follow the restrictive policy of Frankfurt, it should raise its rate to the levels of the ECB's key rate (and if it wants to withdraw liquidity - even above it). However, this is not an option amidst still abundant liquidity in the eurozone as the ECB is already shrinking its balance sheet and is widely expected to accelerate quantitative tightening starting in March. This also is valid for Bulgaria. Even at zero interest rate now, Bulgarian banks keep a total of several billion levs above the minimum required deposit with the BNB.

The land of cheap mortgages

The increase in interest rates by the ECB is transferred almost instantly to the Bulgarian interbank market, and from negative rates in episodic transactions half a year ago, trade is now more active, with interest rates tracking at a small discount the deposit rate of the ECB, currently set nearly 1.85%. The logic is simple - instead of providing liquidity to their counterparts, large banks with parent companies in the eurozone can more easily give it to their head office, which can then deposit it with the ECB. Probably a significant part of the transactions in the Bulgarian interbank market is made of deals in which large foreign-owned banks take liquidity from smaller, locally owned banks and place it outside the country.

As a result, the Bulgarian interbank reference rate on overnight deposit transactions, LEONIA+, also rises, and hence the main interest rate of the BNB, which is the average monthly value of LEONIA+. Another significant and logical effect is that banks are increasingly trying to manage their excess liquidity and export it abroad in search of profit. Beyond that, the transmission of the ECB's monetary policy has so far been felt mostly by companies, as most of their loans are tied to Euribor.

Thus we arrive at a pretty unusual situation. Historically, interest rates on housing loans in Bulgaria have always been far above the average in the eurozone. In a small underdeveloped economy, with endemic corruption, the lowest incomes in the EU, and without a lender of last resort, it is normal for financing to be more expensive. However, the data show that in the last months of last year interest rates on new mortgage loans in Bulgaria suddenly, at least temporarily, turned out to be not only below the EU average but also among the lowest (after those in France and Malta). In addition, Bulgaria is one of the few countries where interest rates are lower compared to their levels a year earlier. Or to put it another way, at the moment an average Bulgarian could take out a mortgage loan at a lower current interest rate than, for example, an average German.

This is only a snapshot. Housing loans are mostly long-term and with floating interest rates, so Bulgaria's relatively low values and negative risk premium cannot be taken for granted. However, they affect lending growth, which has already prompted warnings of a real estate market bubble.