As of January 2025, mortgage holders in Serbia will face significant changes due to the expiration of interest rate caps imposed by the National Bank of Serbia (NBS). This change will result in higher monthly payments for borrowers as new legal provisions come into effect. Over the past year, borrowers benefited from stabilized interest rates, capped at a maximum of 4.08% since October 2023, providing a period of financial relief. However, this measure will conclude, ushering in a new era of mortgage rates and monthly payment adjustments.
The Expiration of Interest Rate Caps
The Transition from 4.08% to 5%
Vladimir Vasić, a consultant and the former Secretary-General of the Association of Serbian Banks, shared insights regarding the impending changes. He highlighted that if the proposed NBS laws are indeed adopted, mortgage payments in Serbia will rise from January 2025 onwards. Specifically, the proposed cap under the new law is set at an interest rate of 5%, higher than the current cap of 4.08%. The impact of this change will vary depending on several factors, notably the loan amount and the timeframe within which it was taken. The way interest on mortgages is calculated means that borrowers first pay off interest before the principal amount, thus those who took out loans more recently are poised to feel the impact more significantly than those with long-term mortgages.
Legislative Review and Implementation
Currently under parliamentary review, a set of laws under the NBS’s jurisdiction, including the Law on Consumer Protection in Financial Services, is anticipated to conclude by the end of December. If enacted, the transitional provision in this law will cap mortgage interest rates at a maximum of 5% from January 1, 2025, until December 31, 2025. This cap will apply to all contracts with variable rates, regardless of whether they were agreed upon before or after the law’s adoption. Vasić argued that this measure is more advantageous for borrowers compared to accepting market rates in 2025. At the present time, the six-month Euribor—a significant determinant of interest rates on euro-indexed loans—stands at about 2.6%, and when combined with a typical bank margin of 3%, totals an interest rate of 5.6%. Vasić expressed a preference for maintaining the existing interest rate of 4.08% beyond January 2025, if possible.
Impact on Borrowers
Financial Implications for Recent Borrowers
As the new law is adopted, mortgage interest rates in Serbia will increase by nearly one percentage point, leading to higher monthly payments for borrowers. Analysis by Bloomberg Adria revealed that a borrower with a recently taken €80,000 mortgage, currently paying about €488 monthly at an interest rate of 4.08%, will see this payment rise by approximately €40, reaching €528 from January 2025. Without the new law, this payment would jump to about €559 due to prevailing market rates around 5.7%. For larger loan amounts, the difference in monthly payments will be more significant. For example, a €120,000 mortgage with a current monthly payment of €732 would increase to €792—an addition of €60. If market conditions prevailed, the payment could rise to €839, an increase of €107.
Long-Term Borrowers and Market Rates
Vasić argued that this measure is more advantageous for borrowers compared to accepting market rates in 2025. At the present time, the six-month Euribor—a significant determinant of interest rates on euro-indexed loans—stands at about 2.6%, and when combined with a typical bank margin of 3%, totals an interest rate of 5.6%. This highlights the benefit of having capped rates which can shelter borrowers from higher market-linked interest rates. Additionally, those with long-term mortgages will be less impacted than recent borrowers, as the majority of their payments would have been directed towards the interest already, resulting in a smaller principal left to calculate interest upon.
Broader Economic Context
The Need for Balance in the Banking Sector
The need for a balance in the banking sector is evident, as pointed out by Vasić. With approximately 165,000 people holding mortgages in Serbia, over 95% of these loans are euro-indexed with variable interest rates. Administrative measures influencing the market can be temporarily justified, especially during drastic interest rate spikes that heavily impact household budgets. However, long-term solutions must support a counterbalance to the dominant banking sector, which controls over 95% of the circulating money in Serbia. New financing sources are essential, as the current market is concentrated in seven or eight banks.
Future Provisions and Market Stability
The proposed Law on Consumer Protection in Financial Services introduces a future provision defining the maximum variable mortgage interest rate as the weighted average rate for existing variable-rate mortgages, increased by one quarter. However, this specific provision is delayed until January 1, 2028. Until then, the rate will be calculated as the weighted average rate plus one fifth, effective from January 1, 2026, to December 31, 2027. This provision aims to offer continued protection to borrowers while ensuring that the interest rates align closely with market conditions, maintaining balance in the financial sector and stability for mortgage holders.
Rising Mortgage Debt and Market Trends
Increasing Mortgage Debt
As of January 2025, mortgage holders in Serbia are set to experience notable changes due to the expiration of the interest rate caps that were imposed by the National Bank of Serbia (NBS). This expiration means that borrowers will face increased monthly payments as new legal provisions come into play. Over the last year, mortgage holders enjoyed a period of financial respite, with interest rates stabilized at a maximum of 4.08% since October 2023. This regulatory measure gave borrowers some relief from fluctuating rates, creating stability and predictability in their financial planning. However, as this measure winds down, mortgage rates and corresponding monthly payments will undergo adjustments that reflect the new legal landscape. This shift marks the beginning of a fresh period for mortgage holders who will need to adapt to the changing economic environment and reassess their budgeting strategies in light of potentially higher financial commitments. The transition could have significant implications for household finances across the country.
