Introduction to the Czech Mortgage Market

The Czech mortgage market has seen steady growth in recent years, with more and more people looking to purchase their own homes. However, the process and requirements for obtaining a mortgage in the Czech Republic can be different from what you may be used to in other countries. It is important to understand these differences and be prepared to meet the necessary requirements in order to increase your chances of being approved for a mortgage.

Understanding the Czech Mortgage Process

The first step in obtaining a mortgage in the Czech Republic is to find a lender and submit a loan application. It is best to seek the help of a mortgage broker or advisor when finding a lender. This will typically require you to provide various documents, such as proof of income and employment, as well as information about the property you wish to purchase. The lender will then review your application and, if approved, will provide you with a loan offer. From there, you will need to sign the loan agreement and provide any additional documentation required by the lender.

Meeting Czech Mortgage Requirements

To be approved for a mortgage in the Czech Republic, you will typically need to meet certain requirements, such as having a stable income and a good credit history. It is also important to have all the required documents, such as proof of income, employment, and property purchase contract draft, ready to submit with your application. Additionally, many lenders will require a down payment of at least 10 to 20% of the property’s value.

Comparing Czech Mortgage Rates and Terms

When looking for a mortgage in the Czech Republic, it is important to compare the rates and terms offered by different lenders. Some of the key factors to consider include the interest rate, the length of the loan, and any additional fees or charges. Another important factor is the RPSN (Real Annual Percentage Rate of Charge), which is the total cost of the loan including all fees and charges expressed as an annual percentage. It’s also important to consider the flexibility of the loan terms, such as whether or not you can make early repayments or change the loan amount. By comparing different offers, you can find the best deal for your specific needs and budget.

Tips for Successfully Navigating the Czech Mortgage Market

• Research: Seek the assistance of professional mortgage broker to help you research different lenders and the products they offer to find the best deal for you.
• Get pre-approved: Getting pre-approved for a mortgage can help you understand how much you can borrow and what your repayments will be.
• Know your credit score: Having a good credit score can help you get a better rate on your mortgage.
• Be prepared: Having all the necessary documents ready when you apply for a mortgage can help speed up the process.
• Get a lawyer: A lawyer can help you understand the legal aspects of buying a property and ensure that the contract is in your best interests.

Conclusion

Purchasing a property in the Czech Republic can be a challenging process, but by understanding the mortgage market, meeting the requirements, comparing rates and terms, and following these tips, you can increase your chances of success. Be sure to do your research, be prepared and seek advice from professionals to make the process as smooth as possible. With the right information and guidance, you can find a home that meets your needs and budget in the Czech Republic.

Author: Ing. Jakub Rotrekl, Ph.D, mortgage specialist

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It all started with the law

In December 2016, a new Consumer Credit Act comes into effect. The law states that the bank is entitled to request from the client, with the exception of certain situations, a penalty corresponding to the costs incurred in the event of early repayment.

What does this mean? There is a consensus in the market that the costs incurred can include the lost interest income until the end of the fixed period.

When calculating the penalty for early repayment of a mortgage, banks simply examine at what rate they originally lent to the client and at what rate they could lend the money again at the time of early repayment. If they could lend the money at a lower interest rate than the client was paying, there is a loss in the form of the difference, and the client will have to pay it. If they could lend the money at a higher interest rate, the client will only be charged an administrative fee of a few hundred crowns, because there is no lost interest.

It is clear that a clients can face a high penalty if they want to repay their mortgage earlier than planned, especially during a time when interest rates on new mortgages are lower than the interest rate on their mortgage. For example, if a client had a mortgage with a 3% rate and wanted to repay it earlier than planned when new mortgages were being provided at a 2% rate.

The Czech central bank is entering the game

In March 2019, the Czech National Bank issued a statement which states, I quote (for those who do not want to read it, simply the lost interest will not pass):

The cost incurred in connection with the early repayment of a consumer loan for housing is not also the reduction of interest income for the lender after the early repayment of the consumer loan for housing, or the interest costs of the lender from its debts. In the first case, this is not a cost, but a lost profit. In the second case, this is not a cost incurred in connection with the early repayment of a consumer loan for housing, but again (a wasted) cost of providing the consumer loan. Therefore, the reduction in interest margin profit or any possible (wasted) refinancing costs, regardless of their designation (such as “opportunity costs”, “costs of obtaining financial resources”, “loss in interest income”), cannot be classified as reasonably incurred costs of the lender incurred in connection with the early repayment of the loan because the legally required connection with the early repayment is missing, and therefore cannot be the subject of compensation that the lender can demand from the consumer according to § 117(2) of the Consumer Credit Act.

And the situation that still exists today is born

According to the interpretation of recommendation of the Czech National Bank, in connection with an early repayment, banks have no other legitimate claims than the reimbursement of administrative costs, which range from 500 CZK to 1500 CZK.

Not all banks fully respected this recommendation of the Czech National Bank and throughout 2019, a sometimes quieter, sometimes quite loud “battle over sanctions” took place. There are many articles on this topic over the years. After many disputes in court, with the financial arbitrator and many tens of millions CZK in fines paid by banks later, it can be stated that all the banks have “calmed down”.

I have my own ranking of banks based on their willingness to respect the interpretation of the Czech National Bank. It is quite clear cut, but I will keep it to myself, because although it is based on my rich experience, it does not necessarily say anything about the future, and also, I do not want to name specific institutions.

What follows from this?

What follows from this is that the bank does not have a tool to hold its client. Here, I would like to emphasize that I do not evaluate the correctness of such a situation or the commercial sense of it, I am only describing reality as it is.

Why is it important to know this?

If you were to take advantage of the current market conditions and purchase a property at a relatively low price compared to a year or two ago, you can do so largely thanks to the high interest rates on mortgages.

So, you have a choice: you can either choose to buy now at a high interest rate, but with the assurance that the purchase price will remain favorable and that you can potentially lower the interest rate later, or you can wait for interest rates to decrease but this could result in a more competitive market and limit your chances of finding a good deal. The dormant demand for property is high, and as interest rates remain high and rents continue to rise, there is a potential for the market to become more active once mortgages become more accessible again.

Can it change?

Yes, it can and it probably will change. There have been talks for a long time about amending the law which will probably change this situation and allow banks to impose sanctions higher than administrative costs. If I go by the current development, I dare to estimate (and it is only an estimate) that this will not happen before the second half of 2024. However, even if it were to happen earlier, I assume that by then there will be at least temporarily lower interest rates on mortgages, and thus the opportunity to lower the rate on existing mortgages.

Author: Ing. Jakub Rotrekl, Ph.D, mortgage specialist

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However, private owners, such as yourself, can also use a sealed bid auction to sell your apartment, house or land. It is suitable for anyone who wants to sell for the maximum price.

We started selling properties using sealed bid auctions in 2015. Since then, we have completed several hundred transactions at RE/MAX Alfa.

Here, I would like to share with you our four year’s of experience in organizing auctions, our observations on their success, their advantages and disadvantages.

What is a sealed bid auction?

A sealed bid auction is often described as a competition for the best offer.

It is called a sealed bid auction because bids for purchasing the property are submitted by prospective buyers to the seller in sealed envelopes.

Today bids do not have to be physically sealed in an envelope (although that is still possible), but instead can be submitted electronically via an online auction system or by email.

At Alfa, those interested in bidding on a property can choose which form is best for them. Most people choose to bid via our electronic auction system or by email, but some, especially the elderly, still prefer to deliver bids in a classically sealed envelope.

We then submit all offers to the seller.

The best offer wins

The best offer does not necessarily mean the offer with the highest price.

Other criteria may play a more important role for the seller.

And it sometimes happens that the seller prefers a bid that is not the highest in monetary value.

For example, if the seller is in a hurry, he may prefer a bidder who offers a faster payment method, albeit a lower price.

Or it sometimes happens that the winning bidder is one who offers the seller a longer time to move out.

The decision on whom to sell is solely up to the owner. The real estate agent is only an advisor during the auction. They may, for example, draw the seller’s attention to a bidder’s unrealistic promises or payment terms, etc.

Advantages of sealed bid auctions

1. Transparency and efficiency

The main advantage lies in the transparency and efficiency of selling this way.

2. Equal opportunity

All interested parties have the same opportunity to buy. It does not matter who views the property first, second or third.

3. Speed

If sealed bid auction is well organized, the property will sell relatively quickly and profitably at the same time. Additionally, because there is a fixed deadline for submitting bids, potential buyers have plenty of time to make a mature decision and are not pressured into making a quick offer.

4. Selling at the maximum price

The buyers decide for themselves which offer to make to the seller. They can offer a higher or lower price dependent on what the property is worth to them.

In the fast-growing real estate market that we have been experiencing in recent years, competition between buyers means that real estate sold this way often achieve the maximum value.

All proceeds from the sale belong to the seller. Our real estate agency is only entitled to a pre-determined fee.

Disadvantages of sealed bid auctions

Sales by sealed bid auctions are simple in principle, but more demanding in terms of preparation, marketing, and credibility of the auction organizer than regular sales. And this is the biggest drawback.

1. Preparation

A sealed bid auction organizer must prepare well by creating clear rules and predicting all potential problems. It’s more challenging than a traditional sale, such that a lack of preparation can end in fiasco.

2. Marketing

In order for an auction to be successful, the seller must make an intensive advertising campaign to attract as many interested parties as possible in a short time. If the auction is badly promoted, only a few people may come to view the property and ake bids, meaning that it will not sell as well as it should. In fact, it may not even sell at all. Making an intensive, high-quality advertising campaign requires sales and marketing experience. If the seller doesn’t possess these skills, then their chances of success drop dramatically.

3. Some people are discouraged by sealed bid auctions

Not all buyers welcome sealed bid auctions. That is a simple fact. Some people openly tell us that if the sale is organized in this way then they are not interested in buying the property.

While, this may seem like a big disadvantage, in reality, people who dislike sealed bid auctions are generally just not interested in making a competitive offer. Consequently, their loss does not have a significant impact on the final sales price.

4. Credibility of the auction organizer

Historically, sealed bid auctions have been labelled as a means for corruption in the sale of state and council property. It is a bad reputation that leads many not to trust them. It is therefore absolutely essential that the auction organizer has a good reputation, and is a trustworth guarantor that everything will be above board and take place according to predetermined rules.

Unfortunately, it still happens that a less honest potential buyer wants to bribe the real estate agent to find the value of rival offers. This includes those who have lost the auction, but then offer a bribe so that they can offer a higher price after the result has been announced. Such conduct is in violation of our auction rules. Unfortunately, there are other ways in which bidders can try to corrupt the auction.

In order for a sealed bid auction to succeed, those taking part must trust the organizers and have faith that it will be conducted according to the rules, otherwise they will not participate. No one wants to be involved in anything corrupt, even if it will not financially hurt themselves personally.

For this reason, we place great esteem and importance in the moral credibility of our real estate agents. In addition, any Alfa estate agent who would even attempt to accept a bribe would be instantly dismissed and face trial for damages.

If you entrust the organization of a sealed bid auction to us, you can be sure that everything will be done cleanly, honestly, and according to the rules.

E-systems oversee human failures

Unlike traditional envelopes, electronic systems can also monitor the moral failure of workers.

The system we use at RE/MAX does not allow the real estate agent who organizes the auction to see the offers received before the deadline. This ensures that no one can inform other bidders about rival offers received and thus influence the auction in their favour. Similarly, no employee is able to discard offers received. The evaluation of the auction often takes place in the presence of the seller, who has a perfect overview of all the offers received.

The future of sealed bid auctions

In my opinion, the sale of real estate through sealed bid auctions has a promising future.

Of course, bidding through electronic systems, which can oversee the weakness of humans, will become more and more widespread, and bidding in traditional envelopes will decline.

There are numerous countries where sealed bid auctions are a very popular way of selling real estate. For example, in Canada, the USA, Australia, and Norway. While the method is growing in popularity in Germany and other countries.

I am interested in selling my property through a sealed bid auction

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Autor článku: Bc. Petr Podlešák, manažer REMAX Alfa

What our clients say about our auctions

We asked our selling clients, for whom we organized an auction, how satisfied they were with the result of the sale. To see what they said, visit the references page.

The post Sealed bid auctions – an excellent way to sell real estate appeared first on REMAX Alfa.

Leverage is a tool that allows you to increase your return on equity with the help of foreign capital. In the case of investing in a mortgage; the lower the interest rates on the loan, the higher the leverage effect.

Buy to Let

Normally, you can achieve a return on your investment of about 4 to 5% per year for residential properties in Prague and the surrounding area. Better investments can achieve more than 6%. However, this often requires experience and a patient search for a suitable property.

Buy to let with financial leverage

With leverage, you can achieve a return on your investment of over 10%.

An example of leverage

You can use financial leverage in several ways when investing and then renting the real estate. I will give you at least one example of how to use financial leverage to increase a property’s value.

Suppose you buy a property for 2,000,000 Czk and assume that the value of your property will increase by an average of 2% per year. According to the Czech Statistical Office (www.czso.cz), this is a long-term realistically achievable result, even when taking into account short-term declines in the real estate market

If you finance the property exclusively from your own resources, then the appreciation is 2%. However, with inflation typically running at 2%, you will not actually increase your wealth. Your investment will only protect you from inflation, nothing more.

However, suppose you finance a portion of the purchase price of a property with a mortgage:

The share of foreign capital investment is therefore 75%. The cost of the interest on the mortgage and amortization should be fully covered by your rental income and therefore does not need to be taken into account in the following calculation. If the rental income does not cover this cost, you have not invested well.

A two percent increase in the price of the property means that in 1 year the market price of the property will be 2,040,000 Ckz, however you have only invested 500,000 Czk.

The yield or return on investment (ROI) = annual return on real estate value increases / investment

ROI = 40,000 / 500,000 = 8% annual return

If you have 2,000,000 Czk at your disposal, it may be more advantageous for you to buy many properties instead of just one. Using your two million as a deposit on multiple mortgages.

If you buy two properties with a total value of 4,000,000 Czk and use a mortgage to pay for the other 50% of the acquisition price, the return on investment resulting from a two percent increase in the value of the property will be 4% ROI = 80,000 / 2,000,000.

Similarly, you can invest in property with a total value of 8,000,000 Czk (if, of course, you have a good enough credit rating at the bank). With a 25% equity ratio, you will receive a return of 8% per year on your two million investment. ROI = 160,000 / 2,000,000.

The actual ratio of debt to equity should reflect your financial capabilities, it should therefore factor in some financial cushion for potential risks, such as a collapse in the rental market. For example, the COVID pandemic was disastrous for the holiday rental market in Prague.

Leverage is a good servant but a bad master

Over-lending can be very dangerous even for experienced investors. Fluctuations in the real estate market are not as dramatic as in the stock market, but they do exist. Just look at the decline in property prices from 2008 to 2013. The economic performance of every country fluctuates in cycles, which of course has an impact on the real estate market and this phenomenon must be taken into account.

Real estate investments are long-term investments. It will not pay in the short term. If quickly selling, you must take into account transaction costs, including a real estate acquisition (transfer) tax, which at time of writing is set at 4% of the sales price. In the short term this can easily erase your entire profit. It makes sense to invest in real estate if you want to have assets stored in them for at least 5 years, rather longer. After owning a property for this long, the real estate acquisition (transfer) tax no longer applies (at time of writing). Personally, I follow the principles of Warren Buffet, who said “The most popular time to hold an asset is forever”. From a long-term perspective, investing in real estate is very promising, provided, of course, that you know what you are doing.

Just as financial leverage can be used to increase the investment value of a property, you can apply the same principle when renting and thus multiply the income even more. With a lease, it is possible to achieve a return on equity of over 10% thanks to financial leverage, if you judge the market well and do your maths correctly.

Article prepared by: Bc. Petr Podlešák, manager at RE/MAX Alfa

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