April 10, 2019 / 7:11 PM / 13 days ago

Hungary prepares rate fixing plan for $3.16 bln mortgage stock

* Programme developed by central bank, Hungarian banks

* Aims to mitigate risks of interest rate changes for borrowers

* Participation in rate fixing scheme will be optional -cenbank

* Banks can offer incentives to boost participation -cenbank

By Gergely Szakacs

BUDAPEST, April 10 (Reuters) - Hungary’s central bank is preparing a scheme with local banks to switch up to 900 billion forints ($3.16 billion) of mortgages into fixed-rate loans in a voluntary programme, the bank said on Wednesday.

The move by the National Bank of Hungary and the Hungarian Banking Association is similar to a previous initiative that replaced foreign currency loans, mostly denominated in the safe-haven Swiss franc, with forint loans.

However, unlike that measure, which prevented a catastrophic rise in loan instalments just before a 2015 surge of the franc, participation in the interest rate fixing scheme will be voluntary, the central bank told Reuters on Wednesday.

The new programme targets variable-rate mortgages issued before Feb. 1, 2015, with a remaining lifetime of at least 10 years, affecting as much as 130,000 borrowers, the central bank said.

The measure follows a series of steps launched by central bank governor Gyorgy Matolcsy, a close ally of Prime Minister Viktor Orban, to curb exposure to financial market volatility and strengthen financial stability.

The central bank raised its overnight deposit rate by 10 basis points to -0.05 percent last month, halting a nearly seven-year run of monetary easing, in a move it said was needed to keep inflation near its 3 percent policy target.

The bank has said risks to its policy outlook are balanced, but some market participants say it might need to tighten policy further amid a continued rise in inflation and strong economic growth in Hungary.

“The central bank expects lenders to present the risks of variable-rate loans and to present at least two options of switching to fixed-rate loans with a longer (interest rate) fixing period,” the bank said in an emailed response.

“Having familiarised themselves with the risks and the options to modify their contracts, it will be up to borrowers to decide about taking advantage of the options offered,” said the bank, which is also in charge of financial sector regulation.

Central bank deputy governor Laszlo Windisch said last week that the programme would be launched in the spring, but did not go into detail.

The central bank said that, given the voluntary nature of the programme, local banks could offer unspecified incentives to boost participation.

The Hungarian Banking Association was not immediately available for comment on the possible incentives.

Major lenders in Hungary include domestic OTP Bank , K&H, the local unit of Belgian KBC Groep, Austrian Erste Group Bank and Raiffeisen and Italian UniCredit and Intesa SanPaolo. ($1 = 284.9 forints) (Reporting by Gergely Szakacs)

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