Mortgage during the coronavirus pandemic: Low interest rates, state aid, but also many questions

We took a look at the current situation in the mortgage market.
18.Jan 2021
 
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We've learned how (not only) the coronavirus affected the services banks provide. If you are currently thinking about taking out a mortgage, the following lines could be helpful for you.

More affordable housing for young people

On January 15, the government's newly approved program Own Housing (Vlastní bydlení) entered into force. The State Investment Support Fund thus enables young people to acquire or modernize their own housing. The age limit for joining this loan program has been raised by four years to 40 years. It is now possible to finance cooperative shares, too. Applicants can take out a loan for the modernization of housing in the amount of 50 - 600 thousand crowns for a maximum period of ten years. A loan for the acquisition of a house in the amount of up to 2.4 million crowns (max. 90% of the price) or 2 million crowns for the acquisition of an apartment can be arranged for twenty years.

"Own housing will be more affordable thanks to favorable loans. Our goal is for the new program to be used by many families, who are concerned about the issue of their own housing. The interest rate will be based on the EU rate, but will be reduced by 0.2% per each child under 15 years of age that the applicant takes care of on a permanent basis,"

said Klára Dostálová, Minister of Regional Development.

Michal Teubner from Komerční banka also commented on the changes in the program for LP-Life.cz. He welcomes the changes but points out that they may not be sufficient.

"We appreciate the Ministry's effort to increase the availability of housing for young people. Compared to the original program, there have been positive changes (increase in funding, cooperative housing, loan security), but it will be difficult, especially for families in larger cities, to take advantage of the program, given the current real estate prices."

Stěhování do nového bytu
Stěhování do nového bytu • Source: Freepik.com/yanalya

The situation with real estate prices and estimation

Many expected a possible decline in property prices during the first wave of the pandemic last spring. However, prices in the Czech Republic kept growing throughout the entire year, but at a slightly slower pace than before. In December, the Czech National Bank (CNB) stated in its financial stability report that it considers housing prices in our country to be overvalued by an average of 17 percent, and in some areas of the country by as much as a quarter of the price.

Therefore, people who buy housing in installments these days could be unpleasantly surprised by the lower estimated price of real estate, often by over 10 percent. This could even mean that some of them will not get the mortgage approval. Financial specialist Veronika Hegrová also informed about this issue:

"This is most evident in older properties which are in their original state and properties located in less sought-after areas. In such cases, the estimate may be significantly lower than the purchase price. Banks try to minimize the risk of financial loss this way."

In practice, this may mean that for a property with a price tag of 6 million crowns with a 10 percent lower estimated price than the market price (i.e. 5,400,000 CZK), the originally prepared 1.2 million crowns (20% of the market price) will not be enough. Suddenly you will need 480 thousand crowns more, i.e. total amount of 1.68 million crowns (20% of the amount of 5.4 million Czech crowns + 600 thousand CZK needed to match the market price).

The banks we contacted claim that this is not a common practice. Nevertheless, they admit that the prices of flats and houses on the market are often exorbitant and that they have to reduce the risk of decline in prices with a lower estimated price.

Kalkulačka
Kalkulačka • Source: Freepik.com/xb100

Pronájem bytu Praha Vinoř - 62m
Pronájem bytu Praha Vinoř - 62m, Praha 9

Mortgages and COVID-19

In November 2020, for the eighth month in a row, the average mortgage rate decreased. For the first time since March 2017, it fell below 2 percent, specifically to 1.98%. The volume of mortgages in November rose to 26.9 billion crowns, which is the second-highest value in the history of the Hypoindex. November 2016 still holds the record, when the volume of provided mortgages was a total of 29.7 billion crowns.

The coronavirus year 2020 was not fundamentally affected by the long-term decline in mortgage interest rates, and the rate situation, in contrast to real estate prices, developed positively for those interested in owning a home, as lending rates experienced a long-term decline that even approached historic lows. The banks we contacted agree that a further decline is not very likely this year. Rather, a slight increase is generally expected.

"The level of mortgage interest rates is most affected by the price of resources for their financing. The price of money on the interbank market fell during the coronavirus situation, so banks were able to provide very low mortgage interest rates. At the end of the year, the decline in the price of resources stopped and now shows a growing trend. That's why mortgage interest rates are expected to rise in the future,"

Zuzana Filipová from MONETA Money Bank wrote for LP-Life.cz.

"Last year, interest rates approached historic lows, which was reflected in the increased interest of clients. The further development of rates, especially today, is very much connected with the development of the overall condition of our own, but also the world economy. Under standard conditions, their gradual but not too massive growth would be assumed. At the moment, however, any prediction is difficult,"

Michal Teubner from Komerční banka told us.

Pár v domácnosti plné krabic
Pár v domácnosti plné krabic • Source: Unsplash.com/hiveboxx

"The CNB's interest rates, as well as the current offer of rates on the mortgage market offered by other banks, have an impact on the determination of the mortgage interest rate in general. And for these reasons, we reduced our rates several times last year. So far, the last change took place last October, when we reduced the rates by 0.2 percentage points. Rates on new and transferred mortgages with a 5-year fixation thus start below two percent. Specifically, 1.79% for transferred (refinanced) mortgages and 1.99% for new mortgages. As for estimating the development of interest rates this year, the CNB rate and the offer of competitors will be important again. A further significant reduction in the already low rates is not very likely. On the contrary, a partial increase in the price of the current offer is gradually appearing on the market,"

said Jana Pokorná from Air Bank a.s.

"Mortgage rates were declining last year, but this decline has now stopped and we expect them to take the opposite direction,"

Petra Kopecká from Raiffeisenbank a.s. suggested.

What are the current minimum interest rates at Czech banks?

as of 1st January 2021 (5-year fixation, LTV - "Loan To Value", the ratio between the amount of the mortgage loan and the mortgage lending value up to 80%)

Fio Banka - 1.58%

mBank - 1.64%

Air Bank - 1.99%

MONETA Money Bank - 1.99%

Raiffeisenbank - 1.99%

ČSOB - 2.09%

Česká spořitelna - 2.14%

Komerční banka - 2.29%

It is necessary to realize that these are minimum interest rates. It means those with the lowest possible risk premium. It is advised that you assess your specific situation in relation to several pre-selected banks, whose overall conditions you like the most.

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