Prices of houses rise more than 10%. How about prices of mortgages?

This article was co-written by Monika Souza, a financial advisor belonging to our family of expat-friendly services in Brno.

Although experts predicted something different at the beginning of the coronavirus pandemic, prices are still rising due to the constant mismatch between supply and demand on the real estate market. And now, on the contrary, experts agree that a fall in prices is not to be expected.

Housing prices in large cities rose sharply again last year. According to available information, in Prague, the increase was up to 13%, in České Budějovice by 15%, in Brno or Liberec by more than 16% and in Ostrava by almost 25%.

What do the prices derive from?

The prices of flats, family houses, building plots and other real estate depend mainly on demand and supply. Demand for real estate in good locations should exceed supply this year as well, so sellers will have no reason to lower prices.

Tip: To check the prices of apartments/properties, use this Transaction Price Map – it shows the values based on actual selling prices per m2. Now partly in English.

What prevents lower prices?

Especially cheap mortgages. The same is true for holiday cottages and chalets – there is a constantly growing interest and it’ll be the same in upcoming months. The only places where there could be stagnation or decline are more remote locations from cities and smaller villages. Especially places with minimal civic amenities or lack of job opportunities.

Never mind interest rates, evaluation is the key element of the process

Last year, people in the CR took out a record 200 billion CZK  in mortgages. Interest rates in the Czech Republic are likely to rise this year. Although mortgage rates stagnated at around 2% at the end of last year, they are expected to grow. In January, the CNB left interest rates unchanged. Now we can see a slight rise in interest rates. However, it is still possible to get under 2% p. a.

Tip: To follow the happenings in the banking sector, visit the website of the Czech Banking Association (partly in English).

The interest rate itself is not a crucial part of the mortgage process. Since prices of properties are higher than their real value, the most important is the result of the evaluation of the property. Each bank has different evaluators and different methods and formulas to evaluate properties. Because of this difference, clients can face a problem with the downpayment. The trend continues to over-value the selling price so it is very likely there’ll be a gap between the bank’s evaluation and the asking price. 

Example: Imagine you want to buy a flat for 6,5 mil CZK in Brno. The evaluation of this flat will be 5,9 mil. What will you do if you only count with your own downpayment of 20% of the purchase price (1,3 mil)? Two options can solve this problem: Instead of asking 80% LTV, you can request 90% LTV and still are able to proceed with the purchase. Your interest rate will be higher and the mortgage then more expensive. Or, you can try to stick to the original 80% LTV and pay the difference from your savings. 

(LTV = loan to value ratio. In the CR, the minimal LTV is 90%, e.i. you must cover at least 10% of the asking price with your own equity = from your savings, now with another loan)

This is where a financial advisor can help you. They usually know evaluators with a good reputation, since they process lots of mortgages monthly. They can help you pick the right option for you, which can sometimes mean you pay off the mortgage in a much shorter time and save hundreds of thousands on interest.

Monika claims that foreigners don’t face any disadvantages when it comes to the criteria and conditions of getting a mortgage. Apart from the language barrier. “Many foreigners often think differently and then lose time and keep pouring rent into someone else’s pocket unnecessarily,” she says.

What’s the conclusion?

The expectation that real estate prices will start to fall due to the COVID crisis has not yet been fulfilled, and as it looks, they will probably not even begin to fall.

If you are considering buying a property in the near future, do not hesitate, now is the time to get a cheap mortgage. With the help of a financial advisor, you will make things easier for you.