What is a mortgage and how does it work?

Q: Can I repay the loan early?

Yes, currently, there is an administrative cost of up to 2,000 CZK. Starting next year, it may be 2% of the remaining mortgage amount. Additionally, you have the option to make an extra mortgage payment of up to 25% per year, with the opportunity to do so one month before the loan agreement's anniversary date.

08 February 2024

What is a mortgage and how does it work?

A mortgage is one of the most crucial financial tools that Czechs utilize when purchasing property. It is a type of loan designed to finance the acquisition of real estate—most commonly an apartment, house, or land. The bank provides the mortgage loan and, in return, secures the purchased property as collateral.

How does a mortgage work?

The fundamental principle of a mortgage is relatively simple. When buying a house or apartment, if you lack the cash to pay the full amount, you can borrow the necessary funds from a bank in the form of a mortgage loan. You will then gradually repay the borrowed amount to the bank through monthly installments, consisting of both the loan principal and interest. The purchased property serves as collateral for the bank; if you fail to make the repayments, the bank has the right to seize the property.

The primary advantage of a mortgage loan is the ability to acquire your own home without having to save the full purchase amount beforehand. Through repaying the loan, you gradually gain a larger share of the property and build your ownership. Meanwhile, the interest paid to the bank can be partially tax-deductible.

However, the downside includes the obligation to repay the loan over many years and the risk of the bank seizing your property if you lose your income. Therefore, when choosing a mortgage, it is essential to consider the size of the repayments relative to your income.

A mortgage is a double-edged sword—it can help you acquire your own home, but it can also burden you with significant long-term debt. With a responsible approach, however, it is the most suitable product for financing your own housing. Use our advanced mortgage calculator to find out if you qualify.

How to Get a Mortgage? Conditions for Obtaining a Mortgage

To qualify for a mortgage, you must meet specific criteria set by the banks. Use our online application form and we will walk you through the whole process online for free. The main criteria evaluated by banks include:

Your Income Level

To verify your ability to repay, the bank will require proof of income—typically through a bank statement or employer verification. The bank also examines the ratio of your monthly payments to your total income, known as the Debt-To-Income (DTI), and the ratio of your monthly debt service to your total income, known as the Debt Service-To-Income (DSTI).

The Bank Board of the Czech National Bank (ČNB) has recently decided to maintain the existing upper limits of LTV (Loan-To-Value ratio) indicators, while simultaneously removing the DSTI limit, and starting from January 2024, the DTI limit as well. This decision reflects, among other things, a comprehensive evaluation of the current and anticipated systemic risks within the housing credit market and real estate market, as well as the resilience of the banking sector and households. Despite the ongoing overvaluation of residential property prices, the upper limit of the LTV ratio will remain at 80% of the property value (or 90% for applicants under 36 years old).

Initial Deposit Savings

Banks require you to pay a certain minimum percentage of the property’s value from your own funds, reducing their risk in case you stop making repayments, and they incur a loss upon selling the property. For example, for people under the age of 36, the minimum percentage is 10%, while for people over the age of 36, the minimum percentage is 20%.

Income Source and Stability

Income from employment is usually valued more than income from business or rent. The stability of your income in the future is also important. If you meet these basic criteria, you have a high chance of obtaining a mortgage loan under standard conditions.

How Does the Mortgage Application Process Work?

Once you decide to purchase property with a mortgage, you will need to go through the application and approval process. How does this process work step by step?

Preliminary Loan Calculation

Before submitting an application, you can consult with the bank about your options and calculate a preliminary loan amount, or use the online calculator on the website of a reliable financial aggregator, like Finaram, and calculate a preliminary loan amount without leaving your home.

Pre-approval

Next, you can request a binding pre-approval for a specific amount, providing certainty during property purchase negotiations. Use our online application form and we will walk you through the whole process online for free.

Application Preparation and Submission

Following that, you will prepare and submit the official loan application, along with all necessary documents, to the bank.

Documents for Mortgage Application:

Identification documents
Income documents, including employer verification and bank statements
Property registry statement (Deed of Ownership – List vlastnictví), which is optional
Proposed purchase agreement or reservation contract
Property valuation conducted by an expert (may be available online depending on your location and property type)
Income tax return (required for self-employed individuals) with supporting proof of tax payment
Details of existing liabilities such as loans or mortgages

After application submission, the bank will undergo an approval process, meticulously verifying all information and assessing the applicant’s creditworthiness.

Loan Agreement Issuance

Upon positive evaluation, the bank will send a loan agreement proposal with specific loan conditions. After reviewing, you can sign the agreement.

Loan Disbursement

After signing both the loan and property purchase agreements, the loan will be disbursed, and you can proceed with buying your dream property.

The entire process, from application to loan disbursement, typically takes 2-3 months. A reliable bank or a financial broker will assist you throughout.

Common Mortgage Types

In the Czech Republic, you can choose from several types of mortgage loans, each with its own pros and cons. Hence, it is crucial to consider which mortgage product best suits your financial situation and needs:

Fixed-Rate Mortgage

This mortgage keeps the same interest rate locked in for the entire repayment term, typically 5-20 years. The monthly payments do not fluctuate.

Pros: Predictable payments, protects against rising rate environment, easy budgeting, can penalize prepayments.
Cons: Does not benefit from decreasing rates, initial rate may be higher than adjustable loans, limits flexibility, and tougher to qualify.

Who is it for?

Borrowers who prioritize payment stability and can qualify for the higher initial rates.

Variable-Rate Mortgage

With this mortgage, the interest rate fluctuates based on market conditions and economic policies. Monthly payments go up and down.

Pros: Typically has lower start rate than fixed, benefits from rate decreases, more flexible, easier to qualify, allows larger loan.
Cons: Payment amount fluctuates making budgeting difficult, risk of sharp payment spikes if rates rise significantly.

Who is it for?

Borrowers who are comfortable with interest rate volatility and varying monthly payments.

Specialized Mortgage Products

New Mortgage

This mortgage is used to finance the purchase of a residential property to be used as the borrower’s primary residence. It covers buying houses, condos, apartments, land, etc.

Pros: Typically has the lowest interest rates, allows financing up to 90% of the purchase price, sets repayment terms, gives payment stability, and builds home equity.
Cons: Limited to just purchase of a primary residence, extensive paperwork to prove it is a primary home, total debt ratios still apply.

Who is it for?

First-time home buyers or existing owners buying a new primary residence best fit this standard mortgage.

Mortgage for Refinancing

With this mortgage, an existing home loan is paid off and replaced with a new mortgage, often with better terms. The borrower keeps the same property.

Pros: Ability to get a lower interest rate on the same property, can change from variable to fixed rate, allows tapping equity, consolidates other debts.
Cons: Closing costs and fees to open new mortgage, risk of higher payments if not carefully compared to old mortgage, temptation to over-borrow.

Who is it for?

Existing homeowners who want to refinance for a better rate, cash out, or consolidate debts. Best for those staying long-term.

Non-Purpose Mortgage (American Mortgage)

With this mortgage type, the borrower does not have to specify how they will use the loan funds. The money can be spent freely.

Pros: Maximum flexibility in using funds as desired, often easier to qualify for than other mortgages, allows tapping equity without refinancing.
Cons: Higher interest rates and fees than standard mortgages, requires higher downpayment, risk of overspending on depreciating assets.

Who is it for?

Homeowners who want the flexibility to borrow against their equity without restrictions on the use of funds, even abroad.

Mortgage for Renovation

This type of mortgage is specifically for financing renovations, repairs, or modernization of a property. The funds must be used to improve the existing home in some way.

Pros: Can finance large renovation projects that may be too expensive out of pocket, often has lower interest rates than personal loans, renovation value can increase property value.
Cons: Limited to just renovation costs, extensive paperwork, and inspections to prove funds used properly, total renovation costs may exceed appraisal.

Who is it for?

Homeowners looking to upgrade, remodel or repair their current home. Ideal for those doing large-scale renovations. Not for cosmetic-only improvements.

Offset Mortgage

This mortgage allows you to link your mortgage account with a savings account. As you add funds to savings, the mortgage principal is reduced by the savings amount, reducing the interest paid.

Pros: Can pay off the mortgage early and reduce interest charges, flexible repayments, keeps savings liquid.
Cons: Need financial discipline to regularly grow savings, less savings interest earned than normal accounts.

Who is it for?

Borrowers with fluctuating incomes who want flexibility in repayments. Also good for those who can commit to actively saving to offset interest costs.

Pre-Mortgage Loan (for Cooperative Flat Purchases)

This mortgage provides financing to become a member-owner in a housing cooperative apartment building. Funds go towards the purchase of membership rights.

Pros: Allows purchase of cooperative flats which may be cheaper than condos, monthly costs can be lower than renting.
Cons: Limited availability, weaker borrower rights than condo purchase, limited financing options, and cooperative rules can restrict use.

Who is it for?

Buyers interested in cooperative housing, especially in urban areas. Best for those wanting cheaper ownership costs than a condo purchase.

Mortgage for Energy-Efficient Housing

This mortgage provides preferential financing terms when buying or renovating an energy-efficient, eco-friendly home. Criteria focuses on sustainability.

Pros: Lower interest rates, can finance eco-renovations, loan terms incentivize energy savings, and helps the environment.
Cons: Limited property options, energy certification paperwork, and inspections, costly green upgrades may be required.

Who is it for?

Environmentally conscious borrowers who want to purchase or renovate a property to be energy efficient and reduce carbon footprint.

Mortgage with Non-Purpose Portion

This mortgage splits the loan amount into a purpose portion (for purchase) and a non-purpose portion that can be spent freely.

Pros: More flexibility than a standard purchase mortgage, can tap home equity without refinancing, may qualify for better terms than a personal loan.
Cons: Higher rates and fees than a purchase-only loan, non-purpose portion usually smaller than purpose, the temptation to overspend funds.

Who is it for?

Home buyers who want extra funds for other expenses beyond the purchase price. Also for homeowners needing cash.

Pre-Approved Mortgage (Mortgage Promise)

This means you get permission to borrow money to buy a house before you even pick a house to buy. The lender promises to provide the loan up to a certain amount.

Pros: Knowing the budget and terms upfront makes placing offers easier, locks in rates for several years, and speeds up the final approval process.
Cons: Still need final approval once property is found, extensive paperwork for pre-approval, invalid if financial situation changes.

Who is it for?

Serious buyers want a competitive edge in the bidding process. Also helpful for buyers needing extra time to find the right property.

Buy-to-Let Mortgage

This is a mortgage for purchasing a property specifically to rent out to tenants as an investment. The rental income pays the mortgage.

Pros: Opportunity to generate rental income and build home equity, tax deductions for expenses, lower minimum downpayment than owner-occupied purchase.
Cons: Responsible for property maintenance and management, vacancies can impact the ability to pay, and tenants may damage property.

Who is it for?

Real estate investors seeking steady rental income stream. Best for experienced landlords or those hiring a property management company.

Mortgage for Business

This mortgage is used to purchase or renovate commercial property like office buildings, retail space, warehouses, etc. for a business purpose.

Pros: Allows businesses to finance purchases without tying up working capital, interest may be tax deductible, and helps grow and expand a business.
Cons: Usually higher downpayment required, shorter repayment terms than residential loan, extensive financial documentation required.

Who is it for?

Business owners or investors seeking to purchase commercial real estate, or businesses needing space to operate.

Mortgage for Purchasing Property Abroad

This mortgage finances the purchase of a property located outside the Czech Republic, often for a vacation home or investment.

Pros: Allows buying real estate worldwide, could generate rental income in popular tourist destinations, financing from Czech lender may offer better terms.
Cons: Complex legal and tax implications, currency exchange rate fluctuations, remote property management can be challenging, and limits on foreign buyers.

Who is it for?

Czech buyers seeking vacation properties or investment properties abroad, especially in locations they frequently travel to.

Euro-Denominated Mortgage

The mortgage loan is denominated in Euros instead of Czech Koruna, while the property is still located in the Czech Republic.

Pros: Eliminates currency exchange rate risk if you have income in Euros, may offer better interest rates from some lenders, and predictable payments.
Cons: Currency conversion fees apply, unless income is in Euros there is still some exchange rate risk, and fewer lenders offer Euro mortgages.

Who is it for?

Borrowers who earn income in Euros, or investors who prefer Euro-denominated assets. Reduces exchange rate volatility.

When choosing the appropriate mortgage loan, it is crucial to compare offers from various banks and select the product that best meets your need for long-term payment stability or flexibility.

Interest Rates and Fees for Mortgage Loans

Besides the loan repayments, you must also consider additional costs associated with mortgages. What are the current interest rates and common fees?

Mortgage Loan Interest Rates

Currently, mortgage interest rates in the Czech Republic range approximately between 4-5% per annum for loans with a 5-year fixed rate. These rates are influenced by market conditions and the policy of the Czech National Bank (ČNB). Use our Watchdog tool to set a notification when the rate drops to the desired level.

Interest rates increase with longer fixed-rate periods and shorter fixed-rate periods as well.

Fees Associated with Mortgage Loans

Loan Disbursement Fee: This fee applies to each disbursement of funds from the loan. The first disbursement is free, while subsequent ones may cost 500-1000 CZK.
Early Repayment Administrative Fee: Charged for repaying early
Property Insurance: Mandatory insurance that protects the bank by covering the value of the collateral property.
Repayment Ability Insurance: Insurance that covers loan repayments in case of income loss, disability, etc.

When choosing a mortgage loan, it is important to consider not only the interest rate but also all the additional fees associated with it.

Repaying the Mortgage Loan

How does the mortgage loan repayment process work? What should you pay attention to when making repayments?

Regular Monthly Repayments

Mortgage loans are repaid through regular monthly installments, which consist of two components:

Interest: The current interest calculated on the outstanding loan principal.
Amortization: The portion of the repayment that goes towards reducing the loan principal.

Over time, as you continue making repayments, the interest component decreases while the amortization component increases.

Early Loan Repayment

For mortgages initiated before September 2024, the existing regulations, which typically involve minimal to no fees for certain actions, will apply. However, for mortgages signed in October 2024 and onwards, new fees are set to take effect:

No fees apply in the case of a sale after owning the property for 2 years
A maximum penalty of 1% on the amount repaid for refinancing
Annually, repaying up to 25% of the initial loan balance is permitted without extra charges

Refinancing for Better Terms

If your fixed-rate period is ending or you are looking for better loan terms, you can refinance your mortgage, which means transferring it to another bank or changing its terms.

Property Foreclosure in Case of Non-Repayment

If you are unable to make repayments, the bank may choose to sell your debt or auction off the property to recover the loan amount.

Regular repayments are crucial for successfully paying off a mortgage loan. If you are having trouble making repayments, it is advisable to contact your bank promptly to discuss possible solutions.

Advantages and Risks of Mortgage Loans

Mortgage loans offer significant benefits but also carry serious risks. What are the main advantages and potential dangers of mortgages?

Primary Mortgage Loan Benefits:

Home Ownership: Mortgages allow you to acquire your dream property.
Tax Relief: You can deduct a portion of the mortgage interest from your taxable income, potentially saving up to 22,500 CZK annually per mortgage.
Property Value Increase: Property values in the Czech Republic have been rising long-term, thereby increasing the value of your investment.
Inflation: The real value of the debt decreases over time with repayments. In 20 years, you’ll repay less than initially borrowed.

Key Mortgage Loan Risks:

Inability to Repay: Loss of income or unexpected expenses can lead to repayment delays.
Interest Rate Increase: With a variable rate, a rise in market rates can unexpectedly burden you.
Property Value Decline: The real estate market is volatile, and property values can decrease.
Early Repayment: Early loan repayment incurs high fees.

Despite the risks, the positives of mortgage loans generally outweigh the negatives for most Czech citizens. With careful selection and responsible repayment, a mortgage is a valuable tool for securing home ownership.

Frequently Asked Questions about Mortgage Loans:

What is the maximum loan amount I can get?

The amount depends on your income and repayment ability. Banks typically lend up to 80-90% of the property’s value.

How long can I take to repay the loan?

The maximum loan term is usually 30 years. Some banks offer loans for a term of 40 years, but the most popular and balanced is a 30-year one.

Can I repay the loan early?

No fees apply in the case of a sale after owning the property for 2 years
A maximum penalty of 1% on the amount repaid for refinancing
Annually, repaying up to 25% of the initial loan balance is permitted without extra charges

What if I cannot make repayments?

Contact your bank immediately to discuss solutions. In extreme cases, the collateral property may be liquidated.

Can I deduct mortgage interest from taxes?

Yes, you can deduct a portion of the mortgage interest from your taxable income, potentially saving up to 22,500 CZK annually per mortgage.

What insurance do I need for the loan?

At a minimum, banks require property insurance. Repayment ability insurance is also recommended.

How do I choose the most advantageous mortgage loan?

Compare offers from various banks, considering not only the interest rate but also all additional fees and conditions. You can also contact a reputable financial broker who will propose competitive offers with more favorable terms.

In Conclusion

Mortgage loans are the most common way for Czech households to finance home ownership. Let’s summarize the main advantages and challenges of mortgages:

Main Advantages:

Facilitate the acquisition of desired property
Interest is partially tax-deductible
Gradual repayment increases your property ownership stake

Possible Risks:

Decades-long indebtedness
Rising interest rates and repayments
Risk of losing property in case of non-repayment

Despite certain challenges, for most Czechs, mortgages are the only available option to finance home ownership. With a responsible approach and proper term setting according to household needs, mortgages serve as a useful tool.