On 22 June, the Bank Board of the Czech National Bank (CNB) raised the interest rate by 1.25 percentage points. It now reaches 7%, which is the highest value since 1999. It was an expected step by the representatives of the central bank, whose key mission is to take care of the country's financial and price stability. Raising the interest rate is practically the only tool available to the CNB in the fight against threatening rising inflation.
In the Czech Republic, it was one of the highest inflation rates in Europe, in addition to external factors. Above all, it is the Russian invasion of Ukraine and the subsequent energy crisis, but also strong domestic demand. This was due to the large amount of money poured into the economy during the covid pandemic and the savings that people made at that time, because they had limited opportunities to spend this money.
Banks borrow so they can lend
The reason why the change in the interest rate will sooner or later be reflected in the interest rate on mortgages is simple. Commercial banks providing mortgage loans to people borrow money from the central bank at an interest rate. As the central bank raises or lowers this rate, it actually makes the money it spends into the economy more expensive or cheaper. Among other things, higher interest rates motivate consumers to save more and spend less, which has an anti-inflationary effect, but on the other hand it also hampers economic growth, because entrepreneurs have to limit unnecessary investments with more expensive loans.
In June, according to the Hypoindex, the average interest rate on mortgages was 5.7%, before the CNB's last increase in interest rates was reflected. In the near future, we can expect that interest rates on mortgage loans will certainly reach an average of 6% and probably even further. When we realize that in June 2021 they were at 2.5%, we find that there has been an increase of 3.2% over the last year. At the same time, the fixation of roughly 50,000 mortgages should end this year, and some people may thus find themselves in a very complicated financial situation.
In addition, under the current threat of crisis and extreme price increases, the CNB has started to tighten the very conditions for lending mortgages. Since April, it has re-introduced the obligation of banks to monitor the DTI (set at 8.5 and 9.5 for applicants under 36) and DSTI (set at 45 percent, 50 percent for applicants under 36) indicators and reduced the LTV limit to 80 percent (90 percent for applicants younger than 36). In addition, from January 2023, the countercyclical capital reserve rate will rise from 1.5 to 2 percent.
With the end of the fixation, negotiations begin
People whose fixation ends this year and cannot repay the mortgage, or at least a substantial part of it, have basically two options. Either continue with the same provider or refinance the loan with another bank. In general, refinancing is recommended if the difference between the offered rates is at least 0.3%, but at the same time it can also serve as an effective means of negotiating better terms with the existing provider. Therefore, it is definitely worth thinking about it and finding out the conditions offered by competing financial institutions.
The usual dilemma regarding the length of fixation is solved by almost everyone who takes out a mortgage. This time, however, it seems less complicated than in previous years. Even the biggest pessimists do not expect interest rates to rise significantly in the coming years. Rather, it is assumed that some growth will take place this summer in response to the CNB's move described above, but then the situation should stabilize and interest rates should go down in the coming years as inflation subsides.
Article author: Rudolf Král
- 29. 06. 2022
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