Mortgage conditions get stricter year by year. In the past, it was enough to prove sufficient income, and clients easily reached even 100% financing. Now the process is more complicated, and banks keep setting new rules all the time. Do you know what the conditions for getting a mortgage are? And how do you go about it so that you qualify for one?
Banks assess every mortgage application individually. The approval process itself is fairly lengthy and affected by a number of conditions. First, banks check the client’s creditworthiness, that is, their ability to repay. They carry out what is called scoring, which assesses the regularity and sustainability of the client’s income. That income must also be verifiable.
The Czech National Bank (ČNB) sets the basic conditions for mortgage approval. Banks add further conditions of their own to make sure clients will not have trouble repaying.
Although 2021 looks like a favourable year for getting a mortgage thanks to falling interest rates, the coronavirus crisis has made some mortgage conditions stricter than before the crisis. This is especially true for certain professions.
Risky professions
The coronavirus crisis has caused banks to classify some professions as risky. People in those professions find it harder to get a mortgage. Most often these are people working in tourism (guides, hotels, travel agencies, pilots, flight attendants, long-distance bus drivers and so on), catering (waiters, waitresses and cooks) and culture (actors, singers, theatre staff). Banks will only reluctantly give these professions a mortgage or consumer loan. Professions that can easily lose their jobs also include cross-border commuters (pendleři), whose work can be threatened by border closures, and people from the automotive industry. Self-employed people (osoba samostatně výdělečně činná, OSVČ) are another risky group.
By contrast, banks classify doctors, nurses, lawyers, civil servants, firefighters and police officers among the safe professions. These professions have always been among the safe ones, and in recent months their position has grown even stronger.
Conditions for getting a mortgage
There are several basic types of conditions for getting a mortgage that all banks follow. However, every provider has a different approach to its clients. Although some banks have stricter mortgage conditions, a client may still qualify for a loan with another provider.
Age
The minimum age limit is typically 18. Each bank takes a different approach to the upper age limit. Generally, people of working age have a higher chance of getting a loan. If the client is already retired, their chances are low. Of course, it also depends on the loan amount and the repayment period. A mortgage is usually set up to the age of 67. But it can run until 70 or beyond.
Income
Generally speaking, the client’s income has to be enough for them to manage the mortgage repayments. There is no minimum or maximum figure. It all depends on the mortgage amount, the interest rate and the repayment period. However, the more a client wants to borrow, the higher their income needs to be.
Under the ČNB’s methodology, the repayment amount may not exceed 50% of net monthly income.
What income do banks recognise?
- Wages from employment,
- income from business activity,
- income from long-term rental (current and future),
- annuity,
- parental allowance (rodičovský příspěvek),
- long-service pension (výsluhová penze),
- foster carer’s allowance,
- all types of pensions (disability, old-age, orphan’s and widow’s),
- per diems,
- child maintenance,
- and others.
Some banks do not recognise income based on an agreement to complete a job (dohoda o provedení práce, DPP) or an agreement to perform work (dohoda o pracovní činnosti, DPČ).
Income has to be officially proven. For employees, a confirmation of income is enough, while the self-employed have to submit tax returns for the last two years.
Creditworthiness
Creditworthiness ranks among the most important conditions for getting a mortgage. A mortgage specialist or the bank checks whether the client will be able to repay the loan without problems.
Besides the amount of income, the bank is also interested in whether the client is repaying other loans, or whether they have any record in the debtors’ register. If a mortgage applicant has other loans in place, the bank may assume they will have trouble repaying in the future.
When assessing a mortgage application, the provider also takes into account whether the client has maxed out a credit card or overdraft. Positive records in the debtors’ registers (debts that were duly repaid) are a good factor for both banks and non-bank loan providers. This factor can often help with mortgages too. In short, it is better to have three repaid debts behind you than to take out a mortgage with a completely clean slate.
Record in the debtors’ register
The mortgage provider checks records in the debtors’ register for the last 3 to 5 years. These must be clean. If the applicant has recently acquired a significant record, their chances of getting a mortgage are very low. If it is a minor record, there is still a chance of getting the loan, though the bank may charge a higher interest rate.
If the client is in insolvency (insolvence) or has an enforcement order (exekuce) against them, they can forget about a mortgage altogether.
Property as collateral
Another condition for getting a mortgage is securing it with property. This is usually the same property the client is buying with the loan. If they own several properties, they can use any other one as collateral instead. It must, however, meet the given conditions. It is possible to use several properties as collateral at once. This can help the client get a bigger loan.
The days when banks gave clients a mortgage covering 100% of the purchase price are gone for good. Nowadays, banks most often provide 80% of the price, and at most 90% of the property’s value. A client only gets above that in exceptional cases and under strictly defined conditions. Banks can offer a higher loan in only 5% of the total volume. So the applicant always pays at least 10% out of their own funds.
Residence in the Czech Republic
For Czech citizens, this mortgage condition is a pure formality. Foreigners (Slovak citizens are an exception) must have temporary residence in the Czech Republic (EU citizens) or permanent residence (the rest of the world).
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How to increase your chances of getting a mortgage?
Besides the amount and stability of income, the bank also takes other criteria into account. Here are a few ways to increase your chances of getting a mortgage:
- Apply with a partner (spouse), it is easier to manage together. If one of you is without income for a while, the other can cover the repayments for both of you during that time. At the same time, two incomes make it possible to borrow a larger amount.
- Pay off your other debts. If you have another loan and are able to pay it off early, do so. You will get a better chance of getting a mortgage. The bank will consider you a solvent person if you are not burdened by other loans.
- A longer repayment period. A longer repayment period means a lower monthly instalment. This means a lower risk of being unable to pay. So if the bank did not approve your mortgage, try applying again with a longer repayment period. You will pay more in interest, but your chances will improve.
- A property that is doing well. Property prices have not stopped rising in value, even through the coronavirus crisis. In good locations (large cities, or close to large cities), prices will keep rising further. That is good news for your bank, and above all for you. The flat will appreciate in value in the future and its price will keep rising, ideally if the property is in good condition.
The fixed-rate period
The fixed-rate period (fixace) is a set period for which the agreed interest rate applies. Most often you will come across terms of 1, 3, 5, 7 and 10 years. A short fixed-rate period is suitable especially when you know you will be able to pay off the mortgage sooner. A long fixed-rate period, on the other hand, guarantees stability and an unchanging interest rate. This is suitable especially when you expect interest rates to rise. Any price increase will not affect you.
Once the fixed-rate period ends, you can pay off the loan in full without the bank charging you any extra fees. Another option is refinancing the loan, that is, transferring the mortgage to another bank that offers you better conditions. If you do not use this option, your bank will offer you a rate renewal (refixace), a new interest rate based on current market developments.
