In today’s article, we will look together at the key issues of mortgage processing. After reading it, you will at least have a clear view of what awaits you and how to prepare for it.
If after reading this article you want to get an idea of which bank will offer you the best interest rate today, click on the link below.
Basic pillars
Every mortgage must stand firmly on two pillars. These imaginary pillars are the pledge and creditworthiness. There are cases in which, if one of the pillars is stronger, the other may be weaker. However, it is not possible to take out a mortgage if one of the pillars is completely missing.
So let’s go through them.
Flag
By collateral, we mean the property you will be guaranteeing against the mortgage. The standard mortgage is for the property you plan to finance with the mortgage. So if you are buying an apartment or building a house, you can guarantee this property, but you can also use another property as collateral. There is an important rule of thumb called “LTV” (Loan to Value). The LTV rule in the Czech Republic states that the mortgage amount can be no more than 90% of the value of the collateral. So if you are buying a property worth CZK 5,000,000 and you will also be guaranteeing this property, the mortgage amount can be a maximum of CZK 4,500,000 and the rest will need to be from your own resources. It should be noted that to obtain the most advantageous mortgage, the LTV needs to be 70-80%.
If you don’t have your own resources, there are two ways to help. The first one is a refinancing with another loan. It’s definitely a more expensive route and most banks will tell you straight away that they won’t go down that road with you. But there is still that possibility. The other way is to mortgage another property. Thus, you would be guaranteeing two properties for one mortgage. This route is mainly used by young people whose parents help them by mortgaging their homes. After a few years, when they have paid off part of the loan, this second property can then be bailed out.
Bonita
By creditworthiness we mean the ability to repay the mortgage properly. Banks generally do not want to foreclose and sell properties. Their desired line of business is definitely not real estate. That’s why they will do a proper background check on you before approving your loan. The bank will find out whether you have been paying your other debts properly in recent years. You will also need to prove that you have sufficient income to repay the loan. Again, there is a simple rule of thumb in this regard called “DSTI” (Debt Service-to-Income). The DSTI rule in the Czech Republic says that the sum of all your current debt payments cannot exceed 45% of your total household income.
Let’s explain this with a simple example. Let’s say you already have a car loan with a monthly payment of CZK 3,000. You are now planning to take out a mortgage for CZK 4 000 000 with a future repayment of CZK 15 000. In total, your repayments will therefore amount to CZK 18,000 per month. The bank you are taking out a mortgage loan with will require you to have a total household income of at least CZK 40,000 per month.
Banks can count the following towards your provable income:
- income from employment
- income from business
- rental income / future rental income
- income from the agreement
- income from own company
- income from capital assets
- parental allowance
- maintenance (alimony)
- diets of professional drivers
- retirement pensions
- disability pension
- old-age pension
- widow’s pension
- orphan’s pension
- foster carer’s remuneration
- housing allowance or soldiers’ stabilisation allowance
- …
In the case of proving income, the banks’ methodologies differ greatly and would be a chapter for a separate article. If you go to work, get a sufficient salary in your account, you can go to any bank and choose which one will give you the best conditions. However, if you have income from a business, an income from an agreement, some type of pension or a combination of several types of income, you may find yourself greying before you find a bank that will consider your case positively. For more on the intricacies that can arise when arranging a mortgage, see our separate Article .
It may equally happen that you come across a mortgaged property. Ideally, there should be no easement on the property, it should not be owned by a cooperative, if there is a tenant, it should not have an open-ended contract, etc…
Conclusion.
The mortgage market has changed a lot in recent years and has become more complicated in many ways. The best recommendation I can give you is to use your financial advisor to arrange your mortgage. A financial advisor who does their job to the fullest, has a detailed understanding of the current conditions and methodologies of all banks and will find you a solution that will be passable and ideally the most advantageous.
I can paint my house too, but I’ll still get a painter to do it. First of all, it won’t make such a mess, it will save me time and the result will also be much better.
If you don’t have your mortgage painter yet, email me and I’ll be happy to help you with this important life step.
