Mortgages are not always easy and sometimes you really have to think of different ways to get a complicated mortgage to “approved” status.
I have to say that over the last few years I have encountered more complicated ones than simple ones. But I’m glad for that, because every case takes me a little further. And if I only had standard cases, there wouldn’t be much interesting to write about either.
Today I would like to share with you a case where we had to deal with the complexity of a mortgage with clients on all fronts.
Jarda with Terka
Jarda and Terka live in an apartment in Prague. It’s a 2-bedroom apartment they bought a few years ago with the help of a mortgage. They recently had a daughter, so they started thinking that their current apartment was a bit too small for them. They searched and it didn’t take long to find an apartment that exactly matched their needs. It was in a state that required renovation, which was convenient for the young couple because they could remodel it exactly as they wanted.
So let’s get to the numbers
Already in the article “ What do you expect when arranging a mortgage? ” we said that a mortgage must always stand on two legs. One is the so-called creditworthiness or the ability to repay the mortgage and the other is the sufficient value of the collateral.
- The new apartment has a price tag of CZK 8 900 000 and needs to be renovated for CZK 2 000 000.
- The spouses have CZK 1 000 000 of their own money to use.
- Terka had income from parental allowance, but she has already used it up, so in the eyes of the bank she has no income.
- Jarda is an IT entrepreneur and his annual income is CZK 1.5 million. CZK, the costs are reported as a flat rate of 60%, so the profit according to the tax return is about CZK 600,000 per year, i.e. CZK 50,000 per month before tax.
- The repayment of the existing mortgage is CZK 14 000, the couple is still paying off one loan for CZK 6 000 and the repayment of the new mortgage will be CZK 36 500 per month. In total, 56 500 CZK per month.
You don’t have to be a math teacher to know at a glance that something is not working. Yes, neither the income nor the value of the collateral relative to the loan amount comes out. So what do we do now?
Revenue
My first question was whether the clients even have the money to pay that much back each month. Jarda assured me that although he taxes at a flat rate, he doesn’t actually have 60% of the expenses. Since he is in the IT business, his actual costs are quite minimal and he is confident that he can pay the mortgage in the long term. And now to explain it to the bank.
After analyzing the methodology of a total of 14 different banks, I came up with a solution. We will allow for an exception to recognize income in excess of that shown on the tax return. Today, more banks allow this. Even so, it was not enough, as it was necessary to get to the limit of 113-125 thousand. CZK of deductible net monthly income, and it was simply not possible to conjure that out of Jarda’s tax money.
During the renovation of their new home, the couple still needed to live in their current apartment. But then they planned to keep it and rent it out. This is therefore future rental income, which some banks can offset. We therefore ordered an expert opinion on the general rentability and the additional income was in the world.
Flag
So one leg of the mortgage was solved and the other had to be dealt with. This was the loan-to-value(LTV) ratio. Since the bank has recognized future rental income, however, the methodology requires that the LTV be max. 60%. We were slightly over 90% with LTV. Fortunately, Jarda’s mother decided to help the couple and agreed to pledge her apartment. Jarda will try to redeem part of the mortgage as soon as possible by means of extraordinary repayments, so that he can have it bailed out within 5 years. Still, we were at 70% LTV. So I described the construction of the case to the approving officer, and with the help of some compelling arguments, I managed to persuade him to allow the methodological exception and approve the case anyway.
Last but not least, we needed to submit several competitive offers to the bank to get the lowest interest rate on the market. With a mortgage this high, every tenth of it already costs a lot of money.
The whole case still had a few other obstacles and exceptions, but they do not fit into this article.
Conclusion
As you can see, under certain circumstances it is possible to negotiate with banks. However, it is necessary to be familiar with their methodological rules and know which ones can be bent.
We became friends with Jarda and Terka during the case. We can only wish them continued success and a good life.
And if you found yourself in any part of the article, let’s have a coffee. I like a challenge and complicated mortgages are just fun for me.
