Mortgages are becoming a luxury item in the Czech Republic

Could mortgages become a luxury of the rich in Czechia? Recent house price developments and increases in mortgage loan interest rates mean an increasing number of people simply can’t afford to be homeowners.

New monthly data from Fincentrum Hypoindex shows that the average mortgage rate in Czechia at the start of April is 4.88 percent. This constitutes an increase of 0.26 percent from the previous month, and a jump of a whole percentage point since the end of 2021.

Yet this figure doesn’t take into account the latest base interest rate increase by the Czech National Bank at the end of March. The base rate, on which all other bank loans including mortgages are based, is now five percent. As such, average mortgage rates will likely exceed five percent this month.

“Only some banks have managed to raise mortgage rates since the increase in the ČNB’s base rates,” said Jiří Sýkora, mortgage analyst at Fincentrum & Swiss Life Select. “It is increasingly likely that the average rate will reach five percent, which may not yet be the highest level for this year.”

What does this mean in real terms? A mortgage loan worth CZK 3.5 million, with a fixed term of three years, a maturity of 25 years, and an average interest rate of 4.88 percent, requires monthly payments of CZK 20,227.

“Not everyone can afford this,” said Sýkora. “Due to high rates and high real estate prices, mortgage loans are once again becoming a product only for high-income sections of the population.”

A product for the rich; and for the young. New, stricter rules for the provision of mortgages brought in by the National Bank this month make particularly tough demands on applicants over the age of 36.

Now, people over 36 must have saved at least one-fifth of the property value to get a mortgage. The value of the mortgage must not exceed 8.5 times the person’s net annual income, and the maximum monthly payment must not exceed 45 percent of the net monthly income.

Analysts express concern that in the current housing market, these requirements make it effectively impossible for anyone over 36 earning an average salary to get a mortgage.

Applicants under 36 need to have saved ten percent of the property value, which must not exceed 9.5 times their net annual income. Monthly repayments must not exceed 50 percent of their net monthly income.

Sýkora warns that this situation will lead to “a further reduction in the number of loans provided and increased interest in rental accommodation.”

His prediction is backed up by economist Lukáš Kovanda, who said that “due to the tightening of the conditions and the further growth of interest rates, half of applicants will soon be unable to get a mortgage.”

The broken system is made even worse by the extraordinary growth in house prices in recent years. Data from the OECD shows that Czech real estate prices have grown by 89 percent in the past six years.

This is faster than house price growth in most other EU countries, and much faster than wage growth. As such, an average 70-square-meter flat in the Czech Republic costs 12.2 times the average annual salary.

The cost of housing is prohibitive, but analysts note that with interest rates likely to rise even higher, now’s the time to take out a mortgage for those who can afford it.

“Those interested in buying a house should rush to a mortgage,” said Vojtěch Prokop from the Zaloto mortgage provider. “At this time, a significant drop in rates cannot be expected this year.”