What is the spread and how does it affect the cost of the loan?

16 Aug

December 22, 2017 Currency spread is the main source of income for money changers. Banks whose spread is usually a few percent higher also earn on it. However, there is a fairly simple way to bypass the banking margin. Do you want to learn how to calculate the spread and how to avoid it? We invite you to read. 

What is the spread?

What is the spread?

In the simplest translation, spread expresses the difference between buying and selling currencies. We will meet him both in the bank and in the exchange office or on the forex currency market. Every time we talk about a spread we mean a margin on which a particular institution earns. We will always buy a given currency at a higher exchange rate than we can sell it. For example, when you want to buy 100 euros in an exchange office, we will spend 422 zlotys and 9 groszy on them, however, if you want to exchange the same amount for zlotys, you’ll get 419 zlotys and 10 groszy. The spread expressed in the amount for this transaction is PLN 2 99 PLN.

Bank spread and currency spread

Bank spread and currency spread

The currency spread is found in both banks and exchange offices. However, the bank spread can be several times higher than that in traditional exchange offices, and even several times higher than that found in online exchange offices. The komperia.com portal checked the euro exchange rates at the end of February 2015, January 2016 and March 2016. Bank spreads were at the level of 6.83% – 7.43%. At the same time, internet spreads reached 0.45% – 0.63%. The difference is colossal. Therefore, few people decide to exchange currency at the bank. Most customers are aware that such a transaction will be much more beneficial in an exchange office.

However, the bank spread also affects other operations. The currency spread, like foreign interbank rates, e.g. Savenor or Moneycor, affects the amount of installments of loans granted in foreign currency. The spread can be severe especially in the case of large-scale mortgage loans.

When taking a foreign currency loan, we must be aware not only of the risk associated with exchange rate fluctuations, as franchis have learned painfully, it is also worth asking the bank about the amount of the spread. Another factor that we should pay attention to is the amount of insurance. Premiums can be a large part of a loan installment, especially one incurred by a single, which is usually associated with higher credit risk.

How do you calculate the spread?

How do you calculate the spread?

The easiest way to calculate the spread is to subtract the purchase price from the purchase price. For example, if we have a currency pair of EUR and PLN and in this pair the buy rate on forex on December 12 is 4.2053, and the sell rate is 4.2088, we will get a spread of 0.0035. On the forex market, spread is counted in pips (1 pip = 0.0001), with 100 pips being 1 gr. So in this case the spread is only 0.35 PLN. How do you calculate the spread percentage?

The following formula will help:

  • Spread = [(sell rate – buy rate) / buy rate] * 100%

So in our example:

  • Spread = [(4.2088 – 4.2053) / 4.2053)] * 100%

The result is approximately 0.083%.

What determines the credit spread?

What determines the credit spread?

Banks and exchange offices set the amount of the spread based on individual decisions, exactly in the same way as margins are determined by stores. Based on internal calculations, they forecast profits they want to achieve from currency trading. However, the amount of the bank spread is determined by the market value of the currency exchange rate. It has also been assumed that the spread is higher on currency pairs with a higher risk of fluctuations. Higher margins are also imposed on exotic currencies, for which there is less demand. Until 2011, these internal decisions of banks were of great importance for people living with foreign currency loans. Fortunately, spread costs can now be avoided.

Anti -reading Act

Anti -reading Act

All persons who took out a foreign currency loan before 2011, apart from standard liability costs, such as interest or loan insurance premiums, had to take into account an unfavorable bank spread. The loan agreements were structured in such a way that repayment could take place only in zlotys, and the banks converted payments at the selling rate – higher than, for example, in an exchange office.

The Anti -read Act, which entered into force on August 26, 2011, forced banks to change all foreign currency loans: consumer, mortgage and economic. It did not cover online loans because non-bank institutions have not yet introduced foreign currency loans to their offer.

Since the entry into force of the new regulations, customers of banks and credit unions may repay loan installments in the currency in which they obtained financing. Which means that by converting the tranche of liability on our own, e.g. in an e-currency exchange office, we will bypass the high bank spread. In this way, borrowers save up to several dozen zlotys a month. To bypass the spread, all you have to do is set up a currency account and ensure that you regularly deposit funds into it to help repay the loan.

Spread repayment – what’s next with franchises?

Spread repayment - what

Black Thursday – the day when the Swiss franc soared to an unprecedented level, forced the introduction of regulations safeguarding consumer interests. The mortgage act has been amended. Amendments to the law blocked access to foreign currency loans to people earning only in PLN. The amendment to the law on support for borrowers has also been announced by the president for a long time.

The presidential project, which got stuck in the Sejm, assumes the return of the spread for franchisees. What does this mean in practice? How much can borrowers gain from this? The bill provides for the return of an overpaid bank spread, for which it considers a spread higher by more than 0.5 percent. selling / buying rate of the given currency by the NBP. However, a limit is foreseen. Spread will be returned to 350,000 PLN borrowed capital. In the case of higher loans, the compensation applies to the amount only up to the set limit. It has been calculated that if the new regulations come into force, franchisees can count on a refund of several thousand zlotys.

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