If you are currently considering a new mortgage loan or are just thinking about it for the time being, you will not have missed the fact that practically every week there is new news and new facts about mortgage lending.
Today’s article is more extensive than you are used to with me. In return, however, it will provide you with comprehensive information on current developments in the mortgage market.
The main changes on the mortgage market were taken care of by the Czech National Bank (CNB) and include the following:
16.3.2020 – CNB lowers the base interest rate by 0.5%.
26.3.2020 – The CNB cuts the base interest rate by another 0.75%. The total is therefore already -1.25%.
1.4.2020 – CNB relaxes recommended LTV limits from 80% to 90%, DSTI from 45% to 50% and abolishes DTI.
Questions that are on all our minds at the moment:
- How and when will the base rate cut affect the mortgage market?
- Is it worth waiting for a better mortgage?
- Am I more likely to get a mortgage now?
- Will property prices go down? So should I wait for a lower property price and a cheaper mortgage?
I will try to answer exactly these questions in today’s article.
To keep us in the loop, let’s first summarize the current events in the mortgage market and the impact COVID-19 has on it.
A few days after the state of emergency was declared, the Czech Banking Association, which brings together most domestic banks, announced that banks would offer clients a three-month grace period on mortgage loans. The banks have also agreed not to compete with each other and to offer the same terms. This means, first of all, that the loan will not accrue interest during this period and the postponement will not have a negative impact on the bank registers. Hand in hand with this is a bill currently heading to the Chamber of Deputies, which will allow a blanket deferral of all loan repayments for up to 6 months. However, this law already provides that loans will continue to bear interest at the contractually agreed interest rate (but no more than 9% p.a.) and the maturity of the loan will be extended accordingly.
Banks have also significantly tightened lending conditions in recent weeks. Some have suspended 90% of mortgage lending, while others have issued guidance for approvers recommending against approving loans for clients whose income comes from activities most affected by the coronavirus. These include cooks, waiters, taxi drivers, people involved in tourism or cultural events, and others whose income has been virtually suspended by the current measures.
Reduction of interest rates
Simply put, we can say that the interest rate of a mortgage loan consists of 3 parts:
- cost
- risk component
- margin (bank profit)
The CNB cut the base interest rate by 1.25%, which significantly reduced costs for banks. So why are we still not seeing a reduction in mortgage interest rates? This is related to the second part of the interest rate, the risk component. This is very difficult to quantify at the moment. It is virtually impossible to predict how long the current government measures will last. Thus, no one knows exactly how much of an impact they will have on the economy and, by extension, on the population’s ability to repay its obligations. Banks have therefore taken a rather neutral approach to cutting interest rates.
Availability of mortgages
On the April day, the CNB also significantly relaxed the limits for obtaining a mortgage.
LTV 80% => 90%
Until now, banks could grant mortgages up to a maximum of 80% of the value of the property (collateral) and in a maximum of 15% of cases up to 90% of the value of the property. Now these limits have been moved. The CNB now recommends granting mortgages up to 90% of the value of the collateral and in 5% of cases even higher. The possibility of obtaining a 100% mortgage is therefore opening up again. In practice, you will therefore need less of your own money to buy your new home than before.
DSTI 45% => 50% and DTI cancellation
The DSTI (Debt Service to Income) limit has so far been set at 45%. This means that the total sum of your monthly loan repayments could be no more than 45% of your monthly household income. Therefore, the mortgage payment had to fit within this limit. This threshold has now been moved to 50%. The DTI rule, which said that the total of your current loan balances could not exceed nine times your annual income, has been abolished.
Although the relaxation of the limits was announced on 1. April, it wasn’t April.
Abolition of the 4% real estate acquisition tax
The Ministry of Finance will submit a proposal to the Government to abolish the tax on the acquisition of immovable property, which is currently 4% of the total purchase price. The bill is expected to be debated in the week of 6. to 10. April. At the same time as the abolition of the real estate acquisition tax, the possibility of claiming a tax deduction for interest paid on a mortgage loan will be abolished. However, those who have already paid the 4% tax will still be able to claim the tax deduction, even if they refinance their mortgage. As the law is only at the draft stage and its discussion and eventual approval will take place in the coming weeks, we will not speculate on when it will come into force. However, it should be noted that it may already have an impact on property prices. Sellers can use this fact as a reason to increase the sale price of the property.
Answers to your questions:
How and when will the base rate cut affect the mortgage market? Am I more likely to get a mortgage now?
Banks will reflect the reduction in interest rates and the relaxation of the current LTV and DSTI limits very slowly. However, the most significant changes can only be expected when the situation around the coronavirus calms down more and the economy gets back on track.
Is it worth waiting for a better mortgage?
This is for everyone to consider. If you have already chosen your future home, the seller will probably not wait for you. However, you can use the current situation to argue for a discount on the sale price and take out a mortgage with a shorter fixation and count on refinancing later.
Will property prices go down? So should I wait for a lower property price and a cheaper mortgage?
This is really pure speculation. Maybe yes, maybe no. Uncertain times may result in a temporary decline in property prices. On the other hand, with cheaper mortgages, their price will rise again due to higher expected demand. Abolishing the property tax can have the same effect.
Conclusion
My mom always told me, “He who chooses for a long time, eventually takes over.” At the time she meant something a little different, but this saying can be applied to our situation. If you have a home selected and you know you have enough income to pay off the mortgage long-term, you probably won’t make a mistake in any case. Common sense is in order. Let’s keep in mind that the coronavirus won’t be around forever and the current situation is only temporary. Whether you buy a property for more or less and get a mortgage at the current or lower interest rate, in 5, 10, 15 years the property price will be completely different and so will your income and mortgage balance. The current situation forces us to plan in weeks and months. But let’s also remember to look a little further into the future.
You can read about what to expect when arranging a mortgage here .
If you read my articles regularly, you are used to a bit more lay language and certainly a more concise presentation. If you have a question about any of these topics, I will be happy to answer it during a phone call. You can find my contact details below. And if you’d like to meet without the veil, let’s have a video chat.
