Czech National Bank tightens mortgage lending effective October 1, 2018

The Czech National Bank has imposed a further restriction on Czech households and their ability to obtain mortgages, thus making mortgages less accessible for many people.

Financial Stability Report

On June 12, 2018, the CNB issued a new financial stability report which has, in line with expectations, set maximum limits on two indicators, DTI and DSTI. The CNB is not pleased with the rise in prices on the real estate market and has indicated that the market is overvalued by 15%, especially in larger cities. New restrictions will apply as of October 1, 2018.

Maximum values: DTI 9x and DSTI 45%

The new limitations for loan applicants are set as follows:

- the amount of a mortgage applicant's total debt must not exceed the nine times annual net income (DTI); and
- at the same time, monthly instalments on all debts must be less than 45% of net monthly income (DSTI)

Example:

Taking into account a young applicant (30 years) who does not have any debts and obligations, and his net income is CZK 30,000 per month, the situation would be as follows:

- According to the DTI, the maximum loan amount is nine times the annual income, i.e. 30,000 x 12 x 9 = 3,240,000 CZK.
- According to the DSTI, the maximum monthly instalment is 45% of net monthly income, i.e. 45% of 30,000 = 13,500 CZK.

If we calculate the current average interest rate of 2.50 % p.a. and a 30-year-maturity, according to the DSTI indicator, the loan can be up to 3,410,000 CZK.

In this case, the DTI limitation would apply, and the applicant would reach a maximum loan of CZK 3,240,000.

In addition to that, we must also calculate that the given interest rate would apply to only 80% LTV mortgage (at 90% LTV mortgage and an interest rate of 3.09 %, the maximum loan according to the DSTI would be 3.160.000 CZK). The applicant would therefore have to have their own resources for 20% of the purchase price + 4% for the tax on the acquisition of real estate.

One small consolation is the fact that individual banks may exceed each indicator in 5% of all cases. In simple terms, the indicators may be ignored for one applicant out of 20.

These restrictions apply only to new mortgages and do not concern the refinancing of existing loans. If you have a mortgage and your fixed-rate term will end, there is no need to worry about staying "locked" in with your current bank and not being able to refinance with another bank.

Who will be the most affected by the new restrictions?

New restrictions can have a major impact on a number of applicants. Out of the many affected groups, a few are listed below:

- young people purchasing their first property
- singles who live alone and whose income will be limited primarily by the DTI indicator (i.e. nine times the annual income of an individual)
- the self-employed - unfortunately, the new restrictions will bring significant limitations for a number of entrepreneurs when applying for a mortgage
- people with low incomes accepted by banks - unfortunately, Czech banks accept only some types of revenue, to which these indicators will have to be applied

And what about the banks?

We will see how individual banks stand up to these limitations. So far, these are still "just" recommendations which banks do not have to adhere to 100%. However, nobody wants to set themselves against a regulator such as the CNB, and therefore it can be assumed that banks will make a large effort to adhere to these new guidelines.

Let’s hope that banks will be challenged to revise the existing methodology for loan processing and income assessment, and that they will consider accepting other types of income which they currently do not accept at all or do so only in exceptional cases. Such a step would at least partially make it easier for some loan applicants.