How to Navigate High Mortgage Rates and Stricter Conditions: Expert Financial Advice

First of all, there are high interest rates and, in addition, stricter conditions for obtaining a mortgage have been in effect for over a year.

The rates now most often range from 5.5 to 6 percent, depending on the length of the fixation. “In addition to making mortgages more expensive, monthly payments are increasing. And the higher the installment, the higher the requirements for the client’s creditworthiness, i.e. for his proven ability to repay. In other words, with the same credit rating, due to higher rates, the client will be able to obtain a lower loan volume,” said Vladimír Weiss, a financial advisor at Partners.

Some people are now unable to get a mortgage because of the income limits for obtaining it, which were tightened by the Czech National Bank last April. Now she’s thinking about relaxing those limits. It could be seen next month.

According to Weiss, clients are most restricted by the DSTI rule, i.e. the ratio of monthly installments to the client’s demonstrable net monthly income. The limit of the DSTI indicator is 45 percent, for young people under 36 it is currently 50 percent.

Another limit of the DTI indicator, i.e. the applicant’s total debt expressed in multiples of his net annual income, was set by the central bank at 8.5. For young people under 36, it is 9.5.

The bank then reduced the ratio of the amount of the mortgage loan to the value of the mortgaged property (LTV) to 80 percent from the previous 90 percent. The 90 percent limit can only be applied by banks to applicants under the age of 36.

“Higher rates and CNB rules form a cocktail that makes mortgages less affordable. On the other hand, from a long-term perspective, it is much more important at what price a person buys a property than what the current rate is – there is an assumption that mortgage rates will drop back to an average of around three to four percent within two to three years. But we have nothing to do with the purchase price of the property,” Weiss pointed out.

From the point of view of a client who is interested in buying real estate for housing or investment purposes, it is advisable for him to know his options – to know the amount of the loan he can reach.

A frequent complication is the difference between the purchase price and the estimated price. “There is an increased risk here for those buyers who have relatively little of their own resources. If the estimated price does not confirm the purchase price, the bank will provide a lower amount of money, and the client must use all the more from his own resources, provide another property for collateral or take out a loan from the building society,” summarized Weiss.

According to him, the question of how long to fix now cannot be answered unequivocally. “It cannot be said that, for example, a three-year fixation is clearly better than a five-year one. And conversely. Currently, five-year fixations still dominate. Personally, I am leaning towards them, but it is important that clients who have rates around five percent and higher be on the lookout and be prepared for negotiations with the existing bank in case of future decreases in mortgage rates,” emphasized Weiss.

“The prevailing opinion is that the period of extremely low interest rates will not simply return, however, in the following years, mortgages should partially return to normal, i.e. at least to slightly lower rates. Therefore, it is currently recommended to fix mortgages for a shorter period so that payers can switch to lower rates earlier. The time for profitable longer fixations will come again,” says the financial manager of Ekonomických staveb Vlasta Pěchoučková.

However, when negotiating a mortgage at a time of high interest rates, he also advises that clients always ask the bank about their options in the event that rates fall below the contracted rate during the period of fixation. “It is possible to change or refinance the mortgage – usually for a fee – even after it has been arranged,” she added.

As experts point out, due to the rapidly growing family costs, it is no longer enough to take into account only the amount of mortgage repayments. The expenses that will be added to the family’s budget when paying off the mortgage are becoming an increasingly important aspect when making decisions.

“It is also necessary to think about the future operating costs for your housing, which you purchase through a mortgage,” Pěchoučková pointed out. “Simply put, when mortgage applicants borrow for energy-efficient new construction, it is certain that they will have significantly lower energy costs compared to owners of a house with a G energy label, saving tens of thousands annually. In the future, they will thus be able to more comfortably repay the mortgage and pay the ongoing costs of running a more eco-friendly house,” she explained.

You can also save on installments by choosing the right life credit insurance. Banks often offer an interest rate reduction of up to 0.2 percent if the insurance is arranged through them.

“However, in such a case, the bank turns to one of its partner insurance companies, and the benefit is greatly reduced because the insurance offer itself is usually not very favorable. The amount of the insurance premium is often in the order of several thousand, which can already represent a considerable amount of money for some clients,” pointed out Pěchoučková.