Will a building savings loan beat a mortgage?

Will a building savings loan beat a mortgage? Just four years ago, you had a real chance of getting a mortgage to buy property with an interest rate lower than 2%. Unfortunately, today’s financial market situation is completely different. It reflects rising inflation linked to repeated lockdowns, lagging supplies of components and products, as well as the energy crisis. Nevertheless, interest in taking out mortgages and building savings loans is growing. Which form of credit is more financially attractive for you?

Which form of loan to choose?

If you decide to fund the purchase or renovation of your current home with a loan, make a considered choice about the source of your borrowed funds. The bank will offer you a choice between a mortgage or a building savings loan. Each form of loan is attractive to you in certain aspects and unfortunately limiting in others.

To draw a building savings loan or a bridging loan, you must have an active building savings contract. You can still set one up even now, at the start of the calendar year, without an entry fee (1% of the target amount) and even online. Set your chosen target amount according to the size of the loan you require.

Before you decide to take out a building savings contract with the option of a loan yourself, compare the offers from all five building societies. They differ in return rates, as well as interest rates for both regular and bridging loans. What are the current options?

The most favourable conditions are prepared for you by stavební spořitelna Moneta. Clients can get a return of up to 4.83% and when applying for a loan, an interest rate from 2.99% awaits them. Similar conditions are also offered by Raiffeisen stavební spořitelna. It will provide its clients with a savings return of 4.76% and a loan with a rate from 2.99%.

Stavební spořitelna České spořitelny offers a housing loan of up to 2.5 million CZK (about 110,000 USD) (for a co-op apartment up to 3.5 million CZK (about 160,000 USD)) without the need for a lien on the property.

💡 Tip: Pay attention also to the article on saving money for your children’s studies: 3 tips on how to choose the most advantageous savings plan for children

How does a building savings loan work?

To be granted a regular building savings loan, you must meet several conditions. One of them is saving funds of at least 35% to 40% of the target amount. Another condition is saving in the building society account for a period of at least 24 months and obtaining an evaluation score of 220 points.

To be granted the loan, you need to provide the building society with your ID card and proof of your income from employment or business (tax return). When drawing higher amounts (300,000 CZK (about 14,000 USD) and more), you must provide the building society with a current account statement for the last six months.

Other documents that the building society will require from you to arrange the loan are a future contract or purchase agreement, an extract from the Land Register, and a property valuation report. The building society will then enter into a Building Savings Loan Agreement with you.

Bridging loan

If, as an applicant for a building savings loan, your savings do not yet qualify you for a regular loan, but you are interested in one, you will naturally first enter the phase of a so-called bridging loan.

What does this mean for you? The building society will provide you with the funds, but at a higher interest rate than for a regular loan. At the same time, you also continue saving in your building savings account (increasing the number of active saving months and your evaluation score).

The higher interest rate will be binding for you until you have saved at least 35% of the target amount. You then get a lower interest rate, which is fixed for you until the loan is paid off, which is a key difference compared to a mortgage loan.

💡 Tip: Read also the article on getting a co-op flat: Is it worth it and how to get a co-op flat?

Building savings loan calculator

If your goal is to get the maximum state contribution, save an amount of 1,700 CZK (about 78 USD) per month. Or send a flat 20,000 CZK (about 920 USD) annually from your savings account before the end of the calendar year. On this amount, you will receive a credited state contribution of 2,000 CZK (about 92 USD) in April of the following year.

The following table illustrates your deposits and yields after six years of saving:

Mortgage versus building savings loan

Is it more advantageous for you to take out a mortgage or rather reach for a building savings loan? The current situation on the financial market and the diverse offers from banks and building societies require caution. Given the complicated pandemic situation, expect interest rates to rise.

What can you count on right now? A more significant increase in mortgage interest rates showed up at the beginning of January 2022, when interest rates rose from 3% to significantly above 4%. This trend reflects the rising inflation rate and slowly increasing property prices, which are once again becoming less affordable.

Comparison of offers

Relatively favourable conditions for taking out a new mortgage are brought by Air Bank. When borrowing over 1.5 million CZK (about 69,000 USD), you can count on an interest rate of 4.29% with any fixed-rate period (5, 7, or 10 years). You can also slightly optimize the interest rate by taking out insurance. With insurance, your new interest rate can reach 4.14%. When transferring your mortgage from a competitor, expect an interest rate of 4.09%, or even 3.94% if you take out insurance.

The offer from Moneta Money Bank is also interesting, which, when you fix the interest rate, will offer you an interest of 3.99% (APRC (roční procentní sazba nákladů, RPSN) 4.08%). The interest rate of a building savings loan at Moneta stavební spořitelna starts at an interest rate of 4.49%. However, as clients, you have the certainty that the bank will not change it for you anymore.

The current offer from Hypoteční banka is less advantageous for you. Under the same conditions, you will get the lowest interest rate starting at 4.49% with a 10-year fixed-rate period (without ability-to-pay insurance).

A different situation arises for clients of ČSOB banky or ČSOB stavební spořitelny. If you belong to this group of clients, seek professional consultation from a financial adviser. The interest rates of both the mortgage and the building savings loan are at similar limits. A decisive criterion for you can be a lower payment, the option of any extra payment, and shortening the loan repayment period.

Before you decide to take out a loan product, visit several financial institutions and request their offers. A mortgage may not always be an ideal or straightforward solution. Always check other financing options as well. The interest rate and APRC (roční procentní sazba nákladů, RPSN) can be more favourable with a building savings loan. In addition, you can pay off a building savings loan early without penalties and negotiate a lower monthly payment. If you are borrowing a smaller amount (up to 1 million CZK (about 46,000 USD), e.g. for renovation), you do not necessarily have to put a lien on your property.