Bulgaria’s authorities are to adopt a new act on mortgage loans in the first trimester of 2015. The initiative came from the Bulgarian National Bank in accordance with the European Mortgage Credit Directive adopted at the end of last year by the European Parliament. This idea aims at providing better protection of the borrowers’ rights. Such legislation is quite necessary in Bulgaria, as mortgage lending was previously under the jurisdiction of the Consumer Credit Act which regulates household credits above EUR 200 with different deadline, amount and purpose.

The main problems which are to be regulated by the new legislation are in three major directions: transparent calculation of the interest rate during the maturity of the loan, the amount of the fees charged for early repayment and the right of the consumer to limit his/her responsibility to the amount of the property, when unable to make regular payments on the loan. The transparent calculation of the interest rates on the mortgage loans is among the prescriptions of the European directive. This problem is well known by the Bulgarian citizens - most commercial banks operating in Bulgaria used to make unilateral changes of the interest rates on their loans. According to the future legislation, the interests are to be based on the indices indicating the average levels of the interest rates used by the commercial banks to exchange fixed-term deposits in given currency -EURIBOR (in Euro) and SOFIBOR (in Bulgarian Leva), etc, plus an additional fixed allowance. Thus, the clients will be able to track the changes to the interest rates and will be informed about the fluctuation of the given indicator on the Internet and in all media covering topics related to economics.

The European directive is planning to keep the early repayment fee and allow consumers to pay off their debts earlier. This fee was abolished in Bulgaria by a special legislation at the end of July, 2014. However, empirical data shows that the banks do not use this fee, when they provide other types of loans. In order to compensate the abolishment of this fee, some financial institutions adopted new fees, or made a slight increase of their interest rates.

The new act deals with a very important public issue - the right of the debtor to choose the responsibility threshold. There are two main possibilities - the first one envisages a full responsibility to the amount borrowed. According to the second option, the responsibility would be limited to the amount of the real estate property. According to the second option, if the client fails to make regular payments on the loan, the bank will be compensated with the amount received from the sale of the property. However, it would be at the expense of higher interest rates and a smaller amount, for instance up to 50% of the total price. A similar situation would compensate to some extent the lack of a personal bankruptcy law. At the end of 2014, the interest rates in Bulgaria started to dwindle under the influence of the European Central Bank. Here is how credit expert Tihomir Toshev commented on the process:

“The interest rates on the bank deposits have dwindled and currently they fluctuate between 1% and 2.5% on an annual basis. In my view, the interest rates on bank loans would also drop, as a result of the cheaper resource borrowed by the Bulgarian banks. The first decline of the interest rates on credits will be registered in February or March this year. This downward trend would continue throughout the whole year, because the demand of bank loans remains quite limited. We ended 2014 with interest rates on mortgage loans ranging from 6% to 7%. According to my estimates, these interest rates would fluctuate between 5.5% and 6.5% by end 2015.”

According to the latest forecasts, the interest rates on other types of loans would also see a decline. The interest rates on consumer loans are expected to fluctuate between 7% and 13% and the rates on loans extended to the local business -between 4% and 7%.

English version: Kostadin Atanasov