Jan Sadil, a member of the ČSOB Board of Directors, discussed what is happening in the mortgage market and what effect the recent significant increase in Czech National Bank rates will have in an interview for SZ Byznys.
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The central bank raised its key interest rate by 0.75 percentage point last Thursday. What exactly does this mean for mortgage banks?
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The increase in CNB rates does not have a direct impact on mortgage interest rates. From Monday (The interview was filmed last Friday, October 1 – editor’s note) in the mortgage market, nothing is likely to happen. This is because mortgages have long-term rates, usually five- or seven-year rates. And the sources from which the banks are financed have been expecting such an increase for some time and have reacted and gone up.
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You said nothing would happen from Monday. However, when we look at other banking products, on the day the CNB announced an increase in interest rates, banks began to announce that they were raising interest rates on savings accounts. When will the increase really be reflected in mortgage rates?
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The increase is already happening, if we looked nine months back, we would see that interest rates at the turn of the year were around two percent. Today, the newly offered mortgage rates are an order of magnitude higher, slightly below three percent. The growing trend will continue for some time to come.
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But we should not be scared of what is happening, and we should not forget that two years ago, before the covid crisis broke out, mortgage rates were at a similar level.
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It is true that mortgages have been rising in price for several months, but the CNB has also been raising its rates for some time. After all, the last increase was really drastic. I wonder when this will be reflected in mortgage rates. And can the whole of 0.75% be expected? What rate increase do you expect in the coming months and years?
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If I knew exactly how the rates would develop, I would probably do something else.
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Jan Sadil
- Member of the ČSOB Board of Directors, Chief Executive Officer for Retail Services.
- Graduate of the Faculty of Civil Engineering of the Czech Technical University.
- He started his career at Komerční banka. From 2003 to 2017, he was the head of Hypoteční banka (part of the ČSOB Group).
- He has been a member of ČSOB since 2017.
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I would probably try to trade money and maybe it would be more adrenaline pumping.
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The mortgage market is a bit slower in this respect. Due to the competition on it, it cannot be expected that rates will jump by the same percentage in the coming days as the CNB rates. On the other hand, the resources that banks use to finance mortgages have indeed increased significantly. And if I look at the five-year swap, which is the price we buy money for, it is now 2.6 to 2.7 percent. It is so clear that mortgages will not be provided for 2.6 percent or less. Rather, it will be rates starting with three.
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So do you have a margin of about one percent?
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If we look at the market before the covid, margins were at the level of one percent. If we look at the average market rate and the price of resources, you will find that the mortgage business is very low-margin. And the profitability of a stand-alone mortgage is very low.
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Competition is also an important factor in pricing. It is very strong in the mortgage market, banks compete a lot over the interest rate. It’s about where we dare to go to each other.
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As clients, we are glad that there is so much competition here. Rising rates were expected to gradually dampen the huge refinancing trend, which has already come to be called mortgage tourism. Refinancing accounted for up to half of the volume of new mortgages. He was charged with declining rates – it was not difficult for the competition to offer a better rate than the one the client paid. But won’t another wave come, because clients whose fixation ends in the coming months and years will now be frightened and will want to secure relatively low rates long in advance?
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We certainly do not expect the wave we experienced at the beginning of this year and during last year, when mortgage rates fell and much of the new business was refinancing. But it was logical, many clients had a higher rate than was achievable. We can discuss how it is with early repayment fees…
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We’ll get to that.
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But it was logical for clients to at least think about the rate of their mortgage, and therefore the big wave of refinancing.
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We do not have a queue of unhappy or nervous clients “what happens – rates go up”.
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It’s hard to predict what will happen in two years. Of course, clients can come to us today and ask for an offer of a rate that will be refixed, for example, in a year, we will give them such an offer. But the resources from which we make money will certainly be higher compared to the resources we used to finance that mortgage, for example, two years ago.
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So it can be expected that our offer will be higher in nominal amount. That it won’t be 1.9 percent, which may be the client’s current rate, but it will need 2.9 percent. Funding has really become more expensive for us. We do not increase the price because we want to earn more, but we reflect the price of resources in the rates.
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I don’t think a wave of further refinancing will break out, it doesn’t make much sense for clients. It is difficult to predict what the rates will look like in two years. I think it’s reasonable to wait. But it is also fair to manage client expectations that there is no reason why the extremely low rates of the last two years should return in the short term. Rather, we will be at the level of three percent.
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Is the short horizon up to five years? In three years?
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The crystal ball is really very big.
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I try to push you to a more specific answer.
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I know, and you see, it’s hard to get it out of me because I don’t know. Where we see – we are talking about two or three years, and this will be a period of “standard” interest rates rather than the extremely low ones we have experienced in the last two years.
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I will describe a specific situation that basically copies the numbers you mentioned here. A client whose fixation ends in a year has an interest rate of 1.99%…
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Fearing what will happen next, he has already asked his bank to offer a rate for the next fixation period. The bank offered him a rate fixed for seven years, almost one percent higher than he has now. But with the proviso that if he nods at the offer, his repayments will be overpaid from next month, not in a year and a half. In total, he would pay about twenty thousand more by the end of the fixation. Is this a reasonable tax to ensure that he has peace for the next seven years? What can you advise him? Try to forget for a moment that you are a banker and you are trying to make money on it.
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There is no universal advice. We all have a different relationship to money, to the mortgage, we want to keep it, we don’t want to keep it.
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He is a typical Czech, he doesn’t want to take too much risk, he lives in that property, he has a family. He does not want his monthly payment to fly five thousand crowns.
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Developments and our current thinking are influenced by the CNB’s decision on Thursday, although, as I said, the impact on mortgages is not direct. To be a client with such a low interest rate, and if I had two years to refix, I would definitely enjoy that rate for those two more years.
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And he relied on the rates to be around three percent in those two years. Because I don’t really see a reason today why rates should jump somewhere – what can I say for a figure – to ten percent.
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From my specific experience – having a mortgage with an interest rate of 1.9 and 4.9 percent will make a difference of five thousand crowns in a monthly payment.
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But that was an extreme difference. I do not think that we are now in a state where mortgage interest rates should approach in the horizon that I have been talking about.
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This was in 2008 at the beginning of the financial crisis, when mortgages were around five percent.
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My first mortgage was 10.5 percent. To remind ourselves that the rates we are talking about today, at the level of three percent, are still very attractive. These are the cheapest loan funds. And it is right that the cheapest loans are just for housing.
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So you think the rates for a few years will not be around five, but three percent.
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I would like to believe that this will be the case.
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Let’s go back to refinancing. Today, each bank charges the outgoing client a different fee – this is called the purposefully incurred costs associated with the departure. You charge CZK 500, for example Česká spořitelna CZK 700, but there are also banks such as Komerční banka or UniCredit Bank, which still charge tens of thousands of crowns, because they interpret the Consumer Credit Act differently. Has the solution to this faulty condition moved somewhere?
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There are two camps and the situation is confusing. For this reason, too, there is a bill in parliament that should make it clearer. It is already generally accepted that the bank is entitled to cover losses that it would incur in the event of early mortgage repayment. Some banks, including us, charge purely administrative costs.
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This is how the law interprets the CNB, which regulates the market and its interpretation is decisive. The vice-governor of the central bank, Tomáš Nidetzký, recently stated in an interview with SZ Byznys that the bank cannot charge any losses, that it should only be the administration.
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That would be a long discussion. Of course, I saw Mr Nidetzky in your studio, I think his opinion is much closer to reality. The CNB’s position is given and clear, we follow it. The law as it is written is not entirely clear, hence the proposed amendment.
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Which should grant banks up to three percent of the extraordinary installment.
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It doesn’t matter if it’s three percent or how high the ceiling is. However, today’s unbalanced situation should be corrected, when we as providers guarantee clients an interest rate for a certain period. It costs us some resources. The relationship, as interpreted by the central bank today, is unbalanced in that the client can repay at any time and to us if financial losses occur – and they arise…
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Can you concretize it at least in the order of magnitude? How much does a client who goes away with a mortgage cost you?
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In the ČSOB Group, we generated losses in the order of one hundred million crowns for the period when we do not charge these fees. These losses are huge and are due to the fact that, as we have to guarantee funds to clients, and if clients – especially in the period when rates are falling – return to us, we can no longer lend funds on the market at the price at which we obtained them, God forbid yet with margins. And that is indeed a clearly quantifiable loss.
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That is why I am strongly convinced that this situation must be rectified. This is especially important for the stability of the banking sector. If there is an opinion of the CNB, we as a group follow it, even though we have a different opinion. However, the topic ceases to be so topical due to rising interest rates.
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What is the share of refinancing in new mortgages now?
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About 20 percent. At its peak, which was in the second half of last year and at the beginning of this year, it was almost half.
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The proposal to address this situation is in Parliament, now there will be elections. What will happen?
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There will be a delay. But raising interest rates, which the topic sets aside, may give us room to discuss it calmly. And I believe that with the support of the CNB and the Ministry of Finance, the situation will be in order and that it will soon be.
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