In the event of a fall in real estate prices, banks are now valuing properties on applicants for significantly lower amounts, pointed out financial specialist Veronika Hegrová from the Hyponamiru.cz portal. As she added, it can complicate the way for successful mortgage approval for those interested in owning a home.
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Banks are responding to the fact that economic uncertainty and the end of the repayment moratorium have increased the risk of an increase in the number of outstanding mortgages. In addition, a number of financial and real estate experts have long warned that real estate prices are very overvalued in our country. The Czech National Bank (CNB) now estimates this overvaluation at an average of 17 percent, but in selected localities with a high share of investment housing it is as high as 25 percent.
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According to analysts, therefore, real estate prices can be expected to fall in the future.
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“Already the first wave of coronavirus should bring a reversal of the trend and start a decline in property prices. However, according to the real estate price index from Hypoteční banka, no break occurred. Real estate prices continued to rise in the second quarter of this year, although the pace of growth slowed. Now the Czechia is struggling with the second wave of the coronavirus pandemic and the prices of flats, family houses and land are still rising, “Hegrová reminded.
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According to Century 21 operations director Tomáš Jelínek, older flats in good condition become more expensive by an average of about a tenth nationwide, but in large cities it is more expensive.
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However, according to Hegrová, banks’ fears may further worsen the availability of their own housing in the coming months. The Czechs will have to prepare even more of their own money to buy the sought-after property. In the case of a low estimated property price, it is possible to offer the bank a pledge as well as another suitable property.
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“In such a case, it is realistic to cover the entire purchase price of the property with a mortgage,” the specialist added.
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Banks are preparing for worse times
Real estate experts agree that banks providing mortgages are beginning to prepare for worse times.
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“And one of the manifestations is the significantly lower valuation of the property than its current purchase price. This is most evident in older real estate in its original state and real estate in less sought-after locations. Here, the estimate may be significantly lower than the purchase price. In this way, banks try to minimize the risk of financial loss, “stated Hegrová.
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It is not the purchase price that matters, but the value
The mortgaged property serves the bank as a guarantee in the event that the loan is not repaid. If the mortgaged property is auctioned, then the bank will satisfy its receivable with the amount from its sale.
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When calculating the maximum possible amount of the provided mortgage, the decisive factor for the bank is the value of the real estate and not its actual purchase price. At the beginning of this year, according to Hegrová, in 90 to 95 percent of cases the two mentioned amounts coincided.
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At present, banks provide mortgages up to 90 percent of the value of the mortgaged property. Much more often, however, 80 percent mortgages are negotiated, which means that the buyer must add the remaining 20 percent of the property value from their own savings.
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“For example, a property worth four million crowns will cost 800,000. However, this only applies if the bank’s estimate is the same as the purchase price of the property. If the bank valued the property at only 3.6 million crowns, for example, it would have to prepare another 320,000 more, “Hegrová calculated.
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Do not rush to sign the reservation contract
At present, according to her, people should also pay attention to the quick signing of a reservation contract. It may happen that you commit to a purchase and the bank will later lend you less than you need. “It is more advantageous to have the mortgage pre-approved first, and only then to sign a reservation contract,” Hegrová recommended.
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At the end of November, the CNB left the limits for providing mortgages unchanged. The ratio of the amount of the mortgage loan to the value of the mortgaged property (LTV) thus remains at 90 percent. At the same time, the central bank does not now consider it necessary to renew or tighten other parameters for the other two limits on mortgage lending.
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In June, the central bank abolished the limit on the ratio between the monthly repayment of all loans and the total net monthly income (DSTI indicator) when assessing mortgage applications. Earlier, in April, it abolished the debt-to-loan-to-net (DTI) ratio.
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The average mortgage rate fell to 2.02 percent in October from 2.07 percent in September. The rate fell for the seventh month in a row, so low for the last time in March 2017, according to data from Fincentrum Hypoindex.
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However, as economist Lukáš Kovanda pointed out, it makes less and less sense for banks to make mortgages cheaper: on the one hand, they make their own resources more expensive, and on the other hand, it is more attractive for them to value funds by investing in safe government bonds.
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“It is so probable that mortgages in the Czech Republic will not become too cheap and that they will start to rise in price again in the first half of next year. Whoever waits with the fact that mortgages could become even cheaper, will probably not see them again, “Kovanda added.
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Poll
Did you take out a mortgage this year?
No, but I plan to do so in the near future.
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A total of 601 readers voted.
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