Mortgage Rates in the Czech Republic: Insights on Recent Declines and Future Trends

After a period of high inflation and interest rates, which reached their highest levels in recent years in the past two years, the real estate market has been anticipating the decline for months. In September, the Czech National Bank cut interest rates again by 25 basis points to 4.25 percent and are at their lowest level since February 2022. This would allow banks to reduce interest rates on mortgages as well.

This is happening, but only very slowly. In October, the average offer rate of mortgage loans was 5.34%. Compared to last October, this is a decrease of less than one percentage point.

According to experts in the field of the mortgage market, there would be room in the market for a more obvious reduction, but the new strategy of the banks has reduced the financing of their own housing.

“Mortgage could be even cheaper. Interest rates could go down faster and more, but banks don’t want to do that for a number of reasons. They probably guessed that it would not bring them a higher profit,” said XTB analyst Jiří Tyleček.

This can be seen by developing two basic market indicators. The first of which is the level of the CNB’s base interest rate, which is one of the guidelines for market rates in the economy. This year, it fell at a much faster pace.

Since last December, they have fallen 2.75 percent from seven percent to 4.25 percent. This is almost three times the rate of decline in the market average.

“The price of money on the interbank market is also important, and it is still at relatively high levels. However, there is room for decline,” said the XTB analyst.

These are called swaps, with which banks guarantee the price of money for a certain period. If the bank wants money for a three-year settlement, it buys a three-year swap and is sure that the client can repay the whole period at a certain interest rate.

In the last few weeks, this type of rate has been increasing around 3.5 percent. And the difference between the market rate offer is widening.

V interview for SZ Byznys The governor of the Czech National Bank, Aleš Michl, drew attention to this development. “I think the rate is still high and it is within the banks’ ability to reduce it,” he said. According to the governor, they keep the difference on the margin. “They have a good margin from it and they want to maintain a profit,” says the governor.

Also according to Jiří Tyleček, banks’ margins increased significantly. “They can be up to twice where they were before covid,” he said. At that time, the market and interbank rate curves were converging.

According to the spokesman of Česká spořitelna, Filip Hrubý, a similar situation happened last year.

“In 2023, for example, the price of interbank loans was between five and six percent, and real mortgage rates were between 5.6 -⁠⁠ 5.9%. For several banks, the actual margins could thus be below the one percent limit, and in terms of risk and distribution costs, these banks provided a de facto subsidy to mortgage prices for clients,” he said.

According to financial expert Jakub Rotrekl, there are two reasons behind the unstable price of mortgages.

“The reluctance to cut interest rates is partly due to the effort to maintain favorable margins for banks. An equally important reason is that, with each reduction, banks are effectively “stealing” their existing portfolios, as they are unable to retain clients at the higher levels that have been agree first,” he said.

A mortgage expert from Broker Trust Libor Osatek also agrees with this, according to whom banks began to include consumer risk in their mortgage prices for the first time last year.

“After almost four years of trying to enact the relevant rules for the reimbursement of deliberately wasted costs, the banks realized that they would not be fulfilling the -objectives to a sufficient extent, and they began to raise the cost of high risk, which they plan within the framework. of each mortgage loan. This is also the reason why the margins optically look bigger,” said mortgage expert Libor Osatek.

According to Ostek, the third reason that prevents the reduction of mortgage rates faster is the new conditions on the mortgage market.

He believes that banks are pricing the risk 0.3 to 0.5 percent higher for individual mortgages. The reason is that the rules for the early exit of clients with a mortgage loan, when the bank can charge up to one percent of these costs that were raised on purpose from this September, just don’t not enough

“If the bank should really charge a loss, that could be hundreds of thousands of crowns for the client,” said an experienced Broker Trust.

Financially, the early exit of a client with a mortgage already pays off when the interest rate is reduced by tenths of a percent. This is shown by the example in the table below, where a change in rate of around three tenths of a percent means savings of thousands of crowns for the client.

On the other hand, even Hypomonitor data from the Czech Banking Association, which shows how many mortgages banks provide, does not give banks much reason to reduce mortgages. The numbers are growing. In September alone, banks and building societies provided mortgage loans for more than 24 billion crowns. In August, it was even 32 billion crowns. So there is interest even at current levels. From the banks’ point of view, there is no reason to discount.

“August’s unprecedented rise in mortgage interest may have been due to the legislative changes in early repayment rules that took effect in September. The development of September is therefore returning to the old track and the mortgage market continues its steady growth, caused by positive consumer sentiment and a gradual decline in interest rates,” said Petr Gapko, chief economist at Moneta Money Bank.

Due to the growing interest in mortgages, despite the higher rates, according to David Eim, vice-chairman of the board of directors at Gepard Finance, we cannot expect rates improved but the stagnation.

“I think this year is better than the banks expected. They may have already fulfilled their plans and have no reason to lower the price,” said a mortgage expert from Gepard Finance.

This is also confirmed by Jakub Rotrekl, according to how some banks were even facing capacity problems due to increased demand for mortgages.

“According to my information, capacities are increasing again in several banks and this, together with higher annual plans, could increase the desire of banks to provide mortgage loans and create a more competitive environment, “said the expert, adding to this development. could start making mortgages cheaper next year.