Mortgages continue to haunt the Czech Republic. They are afraid of refixation, interest rates are frozen at six percent

At the end of last fiscal year, mortgage interest rates were at 6 percent. They were also below two percent just a few decades ago. The interest in housing loans fell more than 60% last year. People with mortgages and expecting a refixation in the coming year are watching closely for changes in mortgage rates. They will pay thousands more for their installment.

Banks and building societies granted mortgage loans totalling 197 billion crowns in the entire of the last year. This represents a 63.6 percent drop in all mortgages year-over-year. The current hypomonitor for the Czech Banking Association (CBA) captures data from all national banks and savings banks. Although 2021 was a remarkable year in terms of mortgage activity, and there was a drop in activity in 2022 year-on-year, the activity in the mortgage market was almost 40% lower than in 2020. That is because the first half last year was still strong, and the second half only showed how much the mortgage market is deteriorating," says Jakub Seidler (CBA Chief Economist).

The most recent figures on the mortgage market are from December when mortgage loans were obtained in an amount of 7.8 million crowns. This was the third consecutive month of an increase, but it was only one percent. A year-on-year comparison shows a significant drop, i.e. 82 percent.

"The number of mortgages that were granted to new homeowners increased from 2,180 a 2,285, which is a very low figure in comparison to previous years. Seidler adds that the extraordinary year 2021 saw an increase in the number of mortgages granted monthly to around seven thousand.

He stated that the volume of mortgages granted in 2014's last months was the lowest since 2014. Even though the number of mortgages has increased over the past 20 years, it is still low. Seidler adds that despite the fact that many of the reasons for weak demand are still present, there is no reason to expect a major change in the near future.

In December, the average mortgage amount was slightly lower than the threshold of 2.9million crowns. This is where it was two years ago. Some households were forced to lower their mortgage amounts due to stricter guidelines from the Czech National Bank (CNB), and higher interest rates that increased monthly payments.

It is unlikely that rates will drop.

The interest rate for newly issued mortgage loans increased slightly to 5.98 percent in December, from 5.96 percent in November. It remained essentially unchanged. The average mortgage rate remains at its highest level in twenty years.

Rates respond with some delay to market interest rates with longer maturities. They reflect a number of factors, including the expected development CNB base rates and the outlook for inflation, economic growth, and the dynamics of comparable interest rates abroad. Experts don't expect a significant drop in them. This year, housing loans will likely become more expensive. "Mortgage rates appear to be at an all-time high. Clients aren't willing to pay such large installments. According to Michaela Bubenikova (director of Banka Creditas' mortgage financing department), a drop in mortgage rates is possible considering the CNB base rate outlook.

Jiri Sykora is an analyst at Fincentrum & Swiss Life Select. She shares a similar view. "For mortgage rates we expect stagnation with very slight fluctuations due to the competition of banks and the termination and announcement of special offers. If the CNB representatives are correct, then a reduction in interest rates may only happen at the end 2023. Sykora predicts that banks will transfer the reduction in mortgage rates to spring 2024 because the winter market isn't exactly healthy.

Evzen Korek director of Ekospol says that discounting mortgages is not on the agenda. Korec states that the only thing that could slightly correct mortgage rates is the banks' efforts at winning over those clients who can afford one.

He said that the same sad reality as the mortgage market applies to real estate. A mortgage is a way for people to finance the purchase of an apartment, or house. "If there are not enough mortgage loans, the real estate market will also collapse." Prague is an example. Half of clients purchased a long-term mortgage to finance a new apartment. However, last year this percentage dropped to less than one fifth. According to our data, these are the lowest levels in 15 years. Korec says that one reason for this decline is the more expensive mortgages.

The monthly installment is higher by thousands of crowns

For an average mortgage size, an increase of one percentage point in mortgage rates means that the monthly payment will increase by approximately 1.5 000 crowns. The six percent interest rate is a significant increase in monthly payments, as it's higher than the two percent rate that was popular in earlier years.

High rates are not just a concern for new applicants but also for borrowers whose fixation is ending this year. The client paid 11,830 crowns a month for a mortgage amounting to three million crowns at a rate 2.49 percent. This was the norm five years ago. He will be paying 17,960 crowns per month if he fixes the rate for five more years.

Czechs have so far paid off their mortgages in a responsible manner. Only 0.57 percent have problems with repayments on their mortgages. The worsening economy and increased monthly payments could lead to a rise in defaulted mortgages. What should you do if your household budget suddenly is not sufficient to pay for the loan? If borrowers have multiple loans, such as a mortgage, consolidation loan may be offered. Then it is possible to combine them all into one. It reduces fees associated with managing multiple loans," Miroslav Majer, fintech hyponamiru.cz, says.

He said that it was possible to have fun talking to the bank about the possibility to extend the maturityloan and defer repayments. "However, delaying repayments or temporarily reducing your repayment amount is an option. This means that interest rates will be higher than if you adhered to the original repayment plan. Majer warns that the bank will also record this information in their credit register. This could make it more difficult to get loans in the future or even completely block your ability to borrow them.

Refinance mortgages is an option. Transferring the loan to another bank with a lower interest rate and other benefits. Refinancing is not advisable at this time because of the small differences in interest rates between banks.

"Personally, I would recommend that you stay with your current bank as there are not many conditions available for refinancing. The difference of 0.2% per annum in the interest rate. Although it may sound appealing, it is important to remember that refinancing will depend on current revenues. In this era of high interest rates, and more stringent parameters, the revenue will need to be substantially higher than before. Jiri Hluchy founded fintech Frenkee.

He advises that you calculate your credit rating to determine if a person is eligible for refinancing and whether the cost is worthwhile. If the credit rating is not good, you can sign an amendment to your existing bank to get at least a loan. Don't let financial advisors or the promise of favorable rates fool you. It pays to think rationally these days,' says Hluchy. Experts believe that refinancing can be a great way to lower your monthly payment once interest rates begin to drop and banks will be more willing to take on new clients.

If the owner doesn't have another housing option, renting a property with a mortgage could be an option. In recent months, rent prices have risen and many people are interested in subletting. Renting a property can help people pay off their mortgage.

The sale of real property with a mortgage is an extreme possibility. Majer says that it is advantageous to keep the real property and sell it only when the market recovers.