Mortgages continue to haunt the Czech Republic. They are afraid of refixation, interest rates are frozen at six percent

Mortgage interest rates remained at six percent at the end of last year. At the same time, just a few years ago they were below two percent. Interest in housing loans therefore fell by more than 60 percent year-on-year last year. People who already have a mortgage and are expecting a refixation this year are nervously watching the development of mortgage rates. The installment will be thousands more expensive for them.

For the whole of last year, banks and building societies provided mortgage loans in the amount of 197 billion crowns. This is a year-on-year drop of 63.6 percent in the case of all mortgages. This follows from the current hypomonitor of the Czech Banking Association (ČBA), which captures data from all domestic banks and savings banks.

“Although 2021 was exceptional in terms of activity on the mortgage market and a year-on-year drop in 2022 was to be expected, activity on the mortgage market last year was almost 40 percent lower even compared to 2020. And that needs to be taken into account , that the first half of last year was still relatively strong and only the second half of the year showed how noticeably the mortgage market is weakening,” says Jakub Seidler, Chief Economist of CBA.

The latest figures from the mortgage market come from December, when people obtained mortgage loans in the amount of 7.8 billion crowns. It was the third month-on-month increase in a row, but still only in the order of one percent. In a year-on-year comparison, there is a noticeable drop – i.e. 82 percent.

“The number of newly granted mortgages increased from 2,180 to 2,285, which represents a very low value in the context of previous years. If we look at the exceptional year 2021, the average monthly number of granted mortgages was around seven thousand in 2020,” adds Seidler.

According to him, the volumes of mortgages granted in the last months of last year were the weakest since the beginning of 2014. The number of mortgages granted even over the last 20 years. “Given that most of the factors behind weak demand persist, we cannot expect a significant turn for the better in the near future,” Seidler further estimates.

The average amount of a mortgage in December ended slightly below the threshold of 2.9 million crowns, where it was last two years ago. With stricter rules from the Czech National Bank (ČNB) and high interest rates increasing monthly payments, some households had to reduce their intended mortgage amount.

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A drop in rates is not expected

The interest rate on newly granted mortgage loans rose slightly to 5.98 percent in December from 5.96 percent in November, essentially unchanged. At the same time, the average mortgage rate is at the highest levels in the last twenty years.

Rates react with a slight delay mainly to the development of market interest rates of longer maturities. A number of factors are reflected in them – not only the expected development of CNB base rates, but also the outlook for inflation, economic development and the dynamics of similar interest rates abroad.

And experts do not foresee a significant decrease in them yet. Housing loans will probably become significantly more expensive this year. “Mortgage rates seem to be peaking. However, clients are not willing to pay such high installments. Considering the outlook for the CNB’s base rate, a more noticeable drop in mortgage rates can be expected only in the second half of this year,” estimates Michaela Bubeníková, director of the mortgage financing department of Banka Creditas.

Jiří Sýkora, an analyst at Fincentrum & Swiss Life Select, has a similar opinion. “For mortgage rates, we expect rather stagnation with only slight fluctuations associated with the competitive struggle of banks and the announcement and termination of various special offers. And if the forecast of CNB representatives comes true, then some reduction in interest rates could only occur at the end of 2023. And with regard to due to the fact that the mortgage market is not exactly blooming during the winter, it is possible to assume that the banks will transfer this reduction to mortgage rates only in the spring of 2024,” predicts Sýkora.

According to Evžen Korek, director of Ekospol, discounting mortgages will not be on the agenda for much longer. “The only thing that could at least slightly correct mortgage rates would be the banks’ efforts to win over the few remaining clients who can still afford a mortgage,” says Korec.

According to him, the sad situation on the mortgage market also applies to the real estate market. Many people finance the purchase of an apartment or house through a mortgage.

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“If mortgage loans are poorly available, the real estate market also collapses. Let’s take the example of Prague, where half of the clients financed a new apartment through a long-term mortgage. Last year, however, this share dropped significantly to less than a fifth. which, according to our data, are the lowest in the last 15 years. More expensive mortgages are one of the reasons for this decline,” continues Korec.

The monthly installment is thousands of crowns higher

To give you an idea – an increase in mortgage rates by one percentage point means an increase in the monthly payment of approximately 1.5 thousand crowns for the average size of the mortgage. Compared to the two percent interest rate that was common on the market in earlier years, the six percent rate means an increase in the monthly installment of up to six thousand crowns.

The high rate scares not only new applicants, but also borrowers whose fixation ends this year. For example, for a mortgage in the amount of three million crowns, with a rate of 2.49 percent, which was common five years ago, the client paid 11,830 crowns per month. If he fixed the rate for five years at the time, this year the rate will increase to the current six percent, so he will pay 17,960 crowns a month.

So far, Czechs are paying off their mortgages responsibly. Only 0.57 percent of mortgages have repayment problems. However, the worsening economic situation and the increase in monthly payments can lead to an increase in the number of defaulted mortgages.

What to do if the household budget is suddenly not enough for the loan? “In case of problems, for example, loan consolidation is offered if people have other loans in addition to the mortgage. It is then possible to merge them all into one. It saves on fees for managing several loans,” advises Miroslav Majer from fintech

According to him, it is also possible to have fun with the bank about the possibility of extending the maturity
loan or deferment of repayments. “However, postponing repayments and temporarily reducing the repayment amount is a last resort. The disadvantage is that you will pay more in interest than if you followed the original repayment schedule. At the same time, the bank will record this fact in the credit register, which may make it more difficult or completely block your access to other loans in the future ,” warns Majer.

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Mortgage refinancing is also offered, i.e. transferring the loan to another bank that offers a lower interest rate or other benefits. But the differences in bank interest rates are minimal in the current situation, and refinancing does not make much sense now.

“Personally, I rather recommend staying with your current bank, as suitable conditions for refinancing, taking into account the current situation, will hardly exist. The difference in the rate of 0.2% p.a. may sound tempting, but it is necessary to realize that the possibility of refinancing will strongly depend on the current revenues, which in the current era of high interest rates and more demanding parameters will have to be significantly higher than in the past,” says Jiří Hluchý, founder of fintech Frenkee.

His advice is to calculate the credit rating and find out whether a person has a chance to achieve refinancing at all and whether it is worth it. “If the credit rating doesn’t work out, then all that’s left is to sign an amendment to the existing bank and at least have the certainty of a valid loan. In short, don’t be fooled by advertising offers from financial advisors and the prospect of favorable rates. Nowadays, it pays to think rationally,” adds Hluchý.

According to experts, refinancing will provide an interesting opportunity to reduce the monthly payment again when interest rates start to fall and banks will be more eager to attract new clients.

Renting a property with a mortgage can be a solution in a financial crisis, if the owner has another housing option. Rent prices have been rising in recent months and there are plenty of people interested in living in a sublet. People can use the money earned by renting a property to pay off their mortgage.

“The extreme possibility is also the sale of real estate with a mortgage. Currently, however, it is more advantageous to hold the real estate and realize a possible sale only after the recovery of the real estate market,” concludes Majer.

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