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In early October 2018 new regulations will come into play in regard to mortgages in the Czech Republic. The Central Czech Bank published an official announcement that the purposes of these regulations is twofold: preventing the generation of a real estate bubble and preventing the development of future problems in the financial system that might be caused by the granting of mortgages that are higher than the ability of the mortgagees to repay.
Following the changes undertaken in April 2017, the Czech Banks are relying more and more on the LTV parameter – (A loan in accordance to the value of the real estate) and they are demanding that it be under 80%. In other words, that the bank will fund no more than 80% of the value of the real estate as it was assesed by a certified appraiser or the bank.
The Czech Banks still have the option of providing more than 80% mortgage, but these mortgages cannot be more than 15% of the bank’s loans portfolio. What this means is that banks will be more careful when providing mortgages. Up to now, the remainder of the property value had to be provided from other resources they possess (mostly self-capital). The attempts to bypass this regulation with other loans (such as loans by other banks), will no longer be accepted by the Central Czech Bank and contradict the new regulation.
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THE NEW CHANGE
In practice, from now on two additional criteria will be considered during the handling of the mortgage application by the banks (In the event that this is a couple or business partners who apply for a mortgage, these values will be set by joint calculations, in other words values which take into account the repayment ability of the different applicants).
- DTI (Debt relative to income) – this parameter considers the debt (Mortgage) relative to the yearly net account. The bar in this case is 9, so that the maximum allowable debt is the yearly income times 9.
- DSTI (Mortgage debt relative to income) – this parameter calculates the monthly mortgage payment relative to the net income. The bar here is 45%, which means 55% of our income must remain in your hands after paying the monthly mortgage payments.
The Czech Republic is not a pioneer in these regulations and a similar integrated system also exists in Slovakia, Austria and the Netherlands. However, this system is usually not as widely used in the states of the European Union.
IT IS IMPORTANT TO KNOW THAT THE NEW REGULATION IS NOT MANDATORY BUT A RECOMMENDATION
The new regulation is not mandatory, and no bank is obligated to follow it to the letter. They are, however, obligated to provide the authorities with an explanation in the event that they fail to implement it. As a result, the final decisions of the banks in regard to mortgages will be in the framework of a triple calculation. In other words, if the mortgage applicant does not meet the requirements of the DSTI, the bank will probably demand a low LTV value or else reject the application completely. In other words – if the mortgage is over 45% of the income, the bank will probably finance only a very low percentage of it, if at all.
WHAT IS THE REASON FOR THE CHANGE IN THE REGULATIONS?
The Czech National Bank has derived lessons from the last crisis in 2008 and is interested in preventing future problems. While the Real Estate market is heating up in various parts of the Czech Republic, and particularly in Prague, the banks fear a domino effect in an extreme scenario where the economy freezes, the unemployment rate rises, or many real estate assets are put on sale. However, many experts claim that there is no cure for the heating up of the real estate market in recent years.
WHAT ARE THE IMPLICATIONS FOR THE REAL ESTATE MARKET?
One of the ramifications of this regulation is that certain clients, particularly those with low wages, will not be able to receive high percentage mortgage, or any.
According to Jan Frait, the department head of economic stability in the Czech Central Bank, only 7 – 8% of the mortgage applicants will not meet the demands. On the other hand, other experts claim that 25 – 33% of the clients will be affected by this regulation, primarily youth who are purchasing an apartment for the first time.
Jiří Kryl of the BrokerTrust Company estimates that as the new regulation will result in rising demand for more remote and less central, and therefore cheaper real estate assets, as Czech citizens will prioritize lower residential costs over better residential areas.
Another possibility is that Czech citizens will prefer to remain in a leased apartment for longer than usual, for example in order to save money to meet the criteria to receive a mortgage and purchase an apartment later on. The projection, therefore, is that the cost of leases will rise.
Some see this as an opportunity for foreign investors that will be able to reach the new standard of mortgage criteria over local Czech that has lower salaries.
It is hard to predict which sites will enjoy a rise in demand, but these will most likely be small apartments in the center of the big cities such as Prague, or else small and medium apartments in common.
WILL THIS REGULATION MAKE IT HARDER FOR FOREIGN INVESTORS TO RECEIVE A MORTGAGE?
Probably not, because foreign investors must already meet strict criteria to receive a mortgage. Most investors who are not resident of the Czech Republic or Czech Citizens can not receive a mortgage of over 60% as of today, so they already meet the requirements of the new regulations.
As aforementioned, most foreign investors purchase real estate in the Czech Republic for investment purposes. They also meet the required income criteria, that is the size of the mortgage relative to their yearly net income, and the monthly mortgage payment relative to their net monthly income.
WHAT WILL BE THE IMPACT OF ALL THIS ON THE MORTGAGE MARKET?
It is hard to say but the following scenario seems most likely: since the overall sum of the mortgages has dropped (some of the clients will not meet the conditions to receive a mortgage and others will take lower mortgages). The expectation is that a customer who receives a mortgage will be considered an important client by the banks and they will seek to keep him – accordingly the competition, via more attractive mortgage conditions, will grow fiercer.
INTERESTS ON MORTGAGES
Since the Czech National Bank (CNB) has proportionately increased the interest rates as well, the possibility that mortgage rates will also moderately increase in the future cannot be discounted. In fact, the Fincentrum Hypoindex (The average periodical interest for common mortgage types) has consistently grown since January 2017, even though only at a relatively low rate. Still, even after the Czech National Bank announced a hike in interest rates on June 2018, the two largest banks in the Czech Republic (Česká Spořitelna and Komerční banka) announced surprisingly that they were reducing the basic mortgage rate by 0.2% so that surprises are certainly possible in this respect as well.
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