Following the outbreak of the coronavirus pandemic, many companies were forced to close down overnight, which of course affected their employees. Many self-employed people also found themselves temporarily without work and thus without income. Many companies expect a significant drop in sales this year, so they are solving their situation by reducing costs, and unfortunately there are and will continue to be redundancies in the future.
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Unfortunately, uncertainty in the labor market disadvantages some professions, especially in the field of tourism, hospitality, long-distance and air transport or the automotive industry, when applying for loans and especially mortgages. The bank may refuse to give them a loan.
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For mortgages, we monitor the industry in which applicants work and from where their income is generated to repay loans
Petr Plocek, UniCredit Bank
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“With regard to the expected economic development, banks will now approach the approval of mortgages as well as other loans even more cautiously and with an emphasis on the long-term sustainability of clients’ incomes. This protects not only himself and his risk, but above all the client and his ability to meet his obligations and not get into potential problems in repaying the loan, “said Radek Perman from Air Bank for Právo.
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Of course, banks have always scrutinized loan applicants, but now they are even more thorough. They monitor both the applicant’s profession and the sector in which he works. However, as the banks themselves point out, it is not possible to generalize that the applicant from the sector most affected by the pandemic may forget about the mortgage.
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“For mortgages, we monitor the industry in which applicants work and where their income is generated to repay loans. Banks are now more cautious in this regard. However, after a thorough assessment of the application, the bank may proceed to provide a loan up to a certain value of the property even though the applicant works in the sector affected by the pandemic, “said Petr Plocek from UniCredit Bank for Právo.
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“It cannot be said that people working in the sectors affected by the coronavirus pandemic cannot obtain mortgage loans,” confirmed Michal Teubner from Komerční banka. Likewise, Filip Hrubý from Česká spořitelna: “However, it is definitely not the case that employees in the field of hospitality or accommodation services are automatically excluded from mortgage applications.”
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The CNB has eased conditions, but banks continue to adhere to them
In two steps, the Czech National Bank (CNB) significantly eased the strict conditions for providing mortgages. Banks should now follow only the LTV indicator (the amount of the loan against the value of the collateral), which can now reach up to 90 percent. The CNB abolished two other parameters (the so-called DSTI and DTI indicators), which took into account the applicant’s income from loan repayments and total indebtedness.
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| Adjustments to the limits of credit indicators for the assessment of mortgage loan applications |
| LTV indicator limit (loan to value, the amount of the mortgage in relation to the value of the mortgaged property) has increased to 90 percent since April 1, 2020. Banks can apply a 5% exemption for mortgages with a higher LTV. It was 80 percent before release. |
| DSTI indicator limit (debt service to income expresses how much of the net monthly income the loan applicant spends on repayments of the total debt) has increased to 50 percent since April 1, 2020. Before the release, it was 45 percent. On 18 June 2020, the Bank Board abolished this indicator. |
| DTI indicator limit (debt to income, the ratio of the amount of debt to the net income of the loan applicant) was abolished from 1 April 2020. Prior to the release, the loan amount had to be a maximum of nine times the annual net income of the household. |
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Mortgages could now be more accessible to a wider range of people. However, despite the fact that banks are no longer so limited by the CNB’s conditions when assessing applications, they continue to monitor the originally set limits.
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“We continue to consider it important to apply the limits set by the CNB to our clients in order to protect them and thus prevent the indebtedness of high-risk groups of clients. Despite the changes that the CNB came up with this year with the repeal of key stricter rules, nothing in this area has changed for us and our clients, and we maintain the current settings, ie DTI of nine times, DSTI of 45 percent and LTV of 90 percent. “Said Andrea Vokálová from Hypoteční banka for Právo. Other banks follow a similar approach.
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Mortgages are getting cheaper
The mortgage market was also affected by a double radical reduction in CNB interest rates. Many banks, some even several times, have started to reduce the price of their mortgages.
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In June, for example, Komerční banka lowered rates by 0.4 to 0.6 percentage points, bringing the minimum interest rates to 2.29 percent (fixation for three to ten years). Mortgages were also reduced by Air Bank this month, with the lowest rate for a new mortgage being 2.29 percent and for a mortgage refixed from another bank 1.99 percent. The bank now provides clients with the opportunity to fix the rate for seven (from 2.09 percent) and ten years (from 2.19 percent). Since mid-June, Fio banka has been offering a rate of 1.78 percent for mortgages with a five-year fixation.
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A few days ago, Equa bank also reduced mortgage rates by up to 0.3 percentage points. It is possible to refinance a mortgage from 1.99 percent per year. Mortgages for the construction or purchase of a house or apartment with a fixation period of three or five years can now be newly acquired with an interest rate of 2.09 percent. In recent days, Sberbank has also reduced mortgages with a fixation period of five, seven and ten years. The interest rate is now 2.19 percent.
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However, clients’ interest in mortgages is not growing significantly. This May was even the second worst May in ten years.
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“The reason is, of course, the coronavirus crisis. In May, the March and April ‘shutdown’ of a substantial part of the economy and measures to combat coronavirus did not manifest themselves in the mortgage market. The mortgage process usually takes several weeks, so the May figures reflect the weaker March and April demand for new mortgages, given precisely the measures to combat coronavirus, but also uncertainty about real estate price developments and real estate acquisition tax, “explained economist Lukáš Kovanda.
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