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 ([email protected]).