Stricter mortgage rules will affect many people. Especially those who already have a loan today will be difficult to apply for a home loan. The CNB will not withdraw from tougher conditions in the foreseeable future.
The figures on the volume of closed mortgages in October speak clearly. People tried to close their home loan quickly before the introduction of the new mortgage rules. In total, more than ten thousand clients passed through the hands of bank advisors, which is the highest in 2018 and almost the most in history.
Why such a mortgage hysteria?
People are afraid that under the new rules they would no longer be able to reach a mortgage and would have to live in a lease, that is to say “in a foreign”. The popularity of this financial product is high. With the rising prices of real estate and rent, everyone – logically – wants to live in their own way and not wait for the landlord to cancel his contract. It is also a form of investment in the future. Because the likelihood of real estate prices falling in the long run is really low. There may also be a price drop in times of crisis, but property prices have also risen in the long term as household incomes increase.
Can we hope for a decline in property prices?
At the end of last year, the CNB estimated property prices to exceed their fair value by 14 percent. Today this number is likely to be even higher. Does this mean that it pays to wait for the bubble to collapse and property prices “finally” fall? Not quite. Prices could start falling now. This is influenced not only by the new mortgage rules, but also by interest increases. However, both together will mean that fewer and fewer people will reach on credit – thus reducing demand, which should mean a fall in prices on the market.
However, it is not certain, mainly because today there is a very small offer of vacant houses and flats on the market and construction proceedings take a long time in our country. Did you know that, according to the World Bank’s annual statistics, the Czech Republic ranked unflattering 127th out of 185 countries compared when it came to building permits? It is easier than in the Czech Republic to obtain a building permit in Iraq, Rwanda, Congo or Kosovo.
How has the CNB changed the rules for providing mortgages in the Czech Republic?
The central bank has been tightening the conditions since the end of 2016, so as to prevent even greater growth in property prices. Initially, it forbade providing loans for the entire price of the property (the so-called 100% LTV – Loan To Value). Subsequently, it reduced the volume of loans provided by the bank at 80-90% LTV to just 15% of the total loan volume. So-called “ninety” so today only get very creditworthy clients.
This tool of belt tightening was used by the CNB for the first time in its history, and because it wanted to tame even more housing demand and property prices, it proceeded to the next step, limiting the client’s indebtedness (both total and monthly). As of November this year, applicants will receive a mortgage of up to nine times their annual income and the total monthly repayment of all loans must not exceed 45% of net monthly income.
What it looks like is easy to calculate.
If you take 25,000 dollars net, you can take a mortgage for a maximum of 2.7 million dollars and your repayment of all loans must not exceed 11 250 USD per month. Interestingly, today’s interest rates, which are below three percent, are almost equal to these two restrictions. Because if you take a mortgage for 2.7 million dollars, for 30 years and at an interest of 2.9% repayment is 11 238 dollars.
Interest rates in the Czech Republic will continue to rise
According to analysts’ forecasts, interest rates in the Czech Republic will continue to rise, so it is very likely that the criterion of 45% repayment of net monthly income will be stricter very soon than the total mortgage amounting to nine times the annual income. But mortgage, whether we want it or not, will surely become a very lucrative service for richer people. Especially people who already have a loan will be significantly limited in the amount of the mortgage. In some regional capitals, people with average incomes do not reach an average apartment.
Analysts estimate that due to new rules, one fifth of people will not reach the mortgage.
The question is whether the situation will improve in the future. I assume that until the real estate prices become cheaper, the CNB will not just resign from the tightening of the rules. So what to do if you want to live in your own and you need a consumer loan, which burden you with a monthly payment of USD 5,000? There is nothing easier than finding an expert to help you consolidate your existing loans and help you reach the mortgage you need. The way can always be found.