Mortgage process and how to successfully buy a property

Tereza Toužimská — Tue, 14 Feb 2023 12:33:00 +0000

However, with the right information and guidance, it is possible to successfully navigate the process and find a home that meets your needs and budget. In this guide, we will cover the basics of the Czech mortgage market, including the process, requirements, rates, and tips for success.

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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Banks Prohibited from Mortgage Early Repayment Penalties

Tereza Toužimská — Mon, 30 Jan 2023 09:40:00 +0000

The fact that banks are not allowed to impose penalties on clients for early repayment of mortgages is like an elephant in the living room in the banking sector. Everyone who is in the know realizes that it is the case, but it is not discussed much. Especially, in banks, for obvious reasons, it is not discussed with clients. I must mention beforehand that no one can guarantee that the situation will not change. But more on that later.

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.