By Margit Feher

Hungary said Monday it plans to limit the interest rates that banks will be allowed to charge on mortgages converted from foreign currencies to the forint, part of its plan to ease the debt burden on households.

A draft law submitted by the Hungarian justice ministry to parliament said such interest rate caps would increase the banking sector's stability.

The government earlier decided to force commercial banks to convert foreign-currency loans, which have become expensive in the wake of the global financial crisis, into forints, hoping the mostly foreign-owned banks which made such loans would bear the brunt of the cost.

The law will "eliminate the foreign-exchange risk crippling borrowers unilaterally, while also supporting the country's financial stability," the bill said.

Prime Minister Viktor Orban said earlier his aim is to raise Hungarian ownership of the banking sector to over 60% from slightly more than 50% now, with some foreign banks eventually leaving.

The bill, whose approval by parliament is not in doubt due to the governing Fidesz party's hefty parliamentary majority, stipulates that banks will have to set an interest rate tied to the three-month Budapest Interbank Offered Rate, or Bubor, on the converted loans. The interest margin, which will be added to the Bubor rate, may not exceed 5.5 percentage points for mortgage loans and may not be higher than 7 percentage points on home-equity loans, the bill said.

There are some 640,000 foreign-exchange loan contracts, 90% of which are mortgages or home-equity loans tied to the Swiss franc. Such loans were popular in Hungary before the 2008 financial crisis, because they were much cheaper to service than forint loans.

Since then, mortgage payments have increased sharply because of the rise of the Swiss franc against the forint, and many households have had difficulty meeting payments.

With various regulations on the conversion rates, on rebates banks are to pay borrowers on the loan-related fees and charges, and now on the future mortgage rates, "we have delivered our promise that the debt burden will fall and the installments will become predictable," said Antal Rogan, leader of Fidesz's parliamentarians.

Hungarian banks will book losses of a combined $3 billion as a result of the government measures, the Hungarian central bank has said. Most banks operating in Hungary are owned by a foreign parent including Austria's Erste Group Bank AG (EBS.VI) and Raiffeisen Bank International AG (RBI.VI), Italy's Intesa Sanpaolo SpA (ISP.MI) and UniCredit SpA (UCG.MI), Belgium's KBC Group NV (KBC.BT), and GE Money Bank, a unit of General Electric Co. (GE).

The debt burden of foreign-currency mortgage borrowers will fall between 25% and 30% as a result of the measures starting March or April, Mr. Rogan added.

Hungary's Banking Association said it would give its opinion on the new rules once they receive parliamentary approval.

The draft law also says that borrowers may pick a new bank once their mortgage is converted into forints to refinance their debt.

"The regulatory caps, which are not super low but clever" and the chance for borrowers to change banks "may apply a lot more pressure on banks to wrestle rates even lower," said Nomura economist Peter Attard Montalto.

"This is not the end of the story," as banks may need even more provisioning as a result and some foreign players may opt for leaving, Mr. Montalto added.

Write to Margit Feher at margit.feher@wsj.com

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