Today’s article will focus on mortgages. We´ll talk about the development of individual conditions for providing mortgages and what it depends on, what we can probably expect in the coming months and years and what my recommendations are.
The interest rate falls during a period of economic recession. At that time, the number of people interested in buying real estate declines which results in fewer mortgage bank clients. Individual banks start to compete with each other in rates to get as many clients as possible. The Czech National Bank also contributes to the decrease by lowering the reference rate from which the mortgage rate is derived. The CNB’s intention is to increase lending and set the economy in motion. In addition to rates, the CNB also relaxes or withdraws lending regulations, such as LTV (maximum ratio of mortgage to real estate), DTI (maximum debt to annual net income) or DSTI (maximum ratio of repayments to net income).
Conversely, in times of economic growth, conditions for lending deteriorate. Real estate is sold like hot cakes and banks aren´t afraid to increase interest rates, demand is strong enough and people will buy anyway. On the other hand, the CNB begins to worry about market being overheated and introduces or tightens mortgage rules.
Given that the amount of debt in the economy grows substantially (governments, businesses and citizens borrow continuously), the cost of debt repayment needs to fall, otherwise the current economic model would end. The main cost of debt is interest which continuously declines in the long run. So we can be sure that in every crisis, when it is necessary to pump as much money into the economy as possible, we reach new interest rate minimums. Furthermore, we can be confident that when the economy starts up again, rates won´t reach the level before the last crisis because this wouldn´t be feasible for the economy. Let’s try to imagine that mortgage interest rates at today’s property prices would be 6 percent, which was the common rate 13 years ago. This is hard to imagine because most borrowers wouldn´t be able to pay such high repayments. Governments and companies would be in a similar position if they had to pay the same interest on their bonds as was common 13 years ago.
Given the current economic outlook, we´re probably at the beginning of a new recession. Currently, the CNB is withdrawing or easing regulations on mortgage lending, banks are lowering interest rates and we´re now able to get below 2 percent. This trend will now last until the economy rebounds which may take several years. Therefore I´d expect a further decrease in mortgage rates and loosening of conditions and interest rates will probably go down to new historical lows. I recommend choosing the shortest possible fixation, e.g. for one year, or ideally don´t fix the rate and choose a variable rate with the option to fix it later on request.
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