Many things happened in 2021, and there is probably no one who was not affected by the events of the year in any way. I would like to look back at the situation in the real estate and mortgage markets and follow up with the coming changes.
– by Světlana Lanza, Finance specialist at M&M finance
The beginning of the year was marked by the pandemic uncertainty, which increased the volume of interest in people looking to invest in the real estate market – by using their savings that were sitting in a common savings account losing value due to inflation.
Low-interest rates, which were usually below 2 %, also contributed to people becoming more interested in real estate. It was predicted that there would be a decline in interest in real estate during this time, however, this did not happen.
Therefore, due to the high demand in real estate – prices have risen. Today, auctions are a common practice where the highest bidder wins.
We have recorded a huge demand for real estate and mortgages. In the middle of the year, the banks had already met their annual targets.
Mortgage processing became slower and we had to wait longer than usual- months compared to the standard deadlines (weeks). To a lesser extent, this is still the case today.
From April, there was a gradual increase in interest rates, which was not drastic at first, but the demand was so high that they did not manage to catch up with deadlines. Something we haven’t experienced before, came in September.
Due to the increase in the base rate by the CNB, banks began to respond by raising rates on average several times a week. It happened to myself. I prepared a calculation and 3 days later in the presentation to the client, the rate was already 0.75 % higher, which seems like a small difference, but does not go unnoticed for high loans.
Currently, rates are almost 4%, and the prediction is that they will get worse. The following changes await us from April 2022:
1. This is primarily a LTV (Loan-to-value ratio). At the moment, it was possible to borrow up to 90% of the property price, it will now be a maximum of 80%, you need to have 20% of the property price available.
2. Income limits DTI (debt to income ratio) or the total debt of the applicant expressed in multiples of his net annual income, will now be 8.5 (if you have a net monthly income of eg 45,000 CZK, annual income is 540,000 CZK, 540,000 x 8.5 = you can borrow a maximum of CZK 4,590,000), however, another DSTI (debt service-to-income) ratio, or the sum of all financial liabilities, will now amount to a maximum of 45% of your income. According to our example, this is an installment of CZK 20,250. However, with the mentioned target amount and interest rate of 3.74%, the installment is CZK 21,340, so only a lower amount can be provided, namely CZK 4,355,300.
The question is, what property can be purchased at this price in the current housing market?
Exceptions will be available to applicants under the age of 36, when they will still be able to apply for 90% LTV, with DTI 9.5 and DSTI 50%.
To sum it up, a smaller number of applicants will meet the conditions of a mortgage. Clients who do not have enough of their own cash and lower wages will fail. This will most likely lead to an increase in the prices of rented real estate and interest in buying outside of Prague.
If you know that you are planning to buy real estate, construction, or renovation next year, but you do not have it yet, you can use the option of pre-approval, when the bank approves your loan under the current conditions and then you have 12-36 months to search for real estate, with a fixed interest rate.
If you have a mortgage and you are nearing the end of the fixation within two years, I also recommend that you address it as well, as the increase in interest rates will hit you hard.
I will be happy to help you arrange a classic or pre-approved mortgage for free.
Světlana Lanza – Finance specialist