Parliament introduces cap on interest rates

Author: Péter Gárdos

Parliament introduces cap on interest rates

Contributed by Gárdos Füredi Mosonyi Tomori

December 09 2011

A new law passed by Parliament in November 2011 introduces an interest rate cap on
consumer mortgage loans and regulates the calculation of interest rates. The new law
enables debtors to ask for the amendment of contracts that were concluded before the
new law entered into force. In addition, it amends the Civil Code by introducing a
mandatory base rate plus a 24 percentage-point cap for contracts where both parties
are natural persons.

The Civil Code provides that unless the parties agree otherwise, a debtor must pay the
interest beyond the principal amount of the debt. However, the code states the opposite
in the case of natural persons, requiring that interest be paid only if the contract so
requires. In the absence of an alternative agreement, the annual interest rate equals
the Hungarian National Bank base rate, which is currently 6.5%. Further, the Civil Code
states that in case of late payment, default interest is due regardless of whether interest
was payable for the agreed term. Such late payment interest also equals the Hungarian
National Bank base rate, if no interest was payable for the period before the debt
became overdue. If such interest was payable, an additional interest in the amount of
one-third of the Hungarian National Bank base rate will also be payable, but overall the
interest must reach the level of the base rate.

Under the existing regime, the parties can choose a different reference rate or fix the
method of calculation as they wish. The only limitation is that the court has the power to
reduce an excessive interest rate.

The new law still provides that the amount of interest must equate to the Hungarian
National Bank base rate, but adds that if the contracting parties are not legal entities,
the interest rate stipulated by them cannot exceed base rate plus 24 percentage points.
The same provision applies for default interest.

The new law also amended the Act on Credit Institutions and Financial Enterprises
(112/1996) by introducing a 24 percentage-point cap on annual interest rates. However,
the cap is not applicable to high-risk, high-cost consumer loans and credit card loans:
the annual interest rates for such loans are capped at 39 percentage points over the
Hungarian National Bank base rate.

The act further restricts the ways in which interest rate can be calculated. The loan
agreement can either peg the annual interest rates to the applicable inter-bank rate, in
accordance with the currency of the loan, or fix such rate for a three, five or 10-year
period.

The act's new provisions have retroactive effect, which is unsurprising in light of the
government's 'unorthodox' approach. The new provisions are applicable only for
contracts concluded after January 1 2012, which is when the provisions will enter into
force. However, if the maturity of the loan agreement concluded before January 1 2012
exceeds a one-year period, the debtors may request that their agreement be amended
as per the terms of the new law.

The opportunity to repay consumer loans in euros and Swiss francs has already
resulted in Ft70 billion losses to Hungarian banks, and the final number could well
exceed Ft200 billion. The act's possible consequences are yet to be determined.

For further information on this topic please contact Péter Gárdos at Gárdos, Füredi,
Mosonyi, Tomori by telephone (+36 1 327 7560), fax (+36 1 327 7561) or email (gardos.peter@gfmt.hu).