Czech National Bank removes major hurdle in securing a mortgage

The Banking Council of the Czech National Bank (ČNB) has announced that from January 2024 it will be easier to get a mortgage due to a change in requirements during the application process. Starting next year, banks won't have to stick to the rule that limits how much someone can borrow based on how much they earn and owe each year.

Known as the debt-to-income ratio (DTI), banks currently evaluate a mortgage applicant’s total debt payments (to various institutions) relative to their gross monthly income. In basic terms, the upcoming change will mean that people with higher levels of debt will be able to apply for a mortgage anyway.

Currently, the DTI limit stands at 8.5 for applicants over 36 years old, and 9.5 for applicants under 36 years old. However, the ČNB's decision to discard this measure stems from the belief that higher interest rates inherently mitigate risks associated with applicants' income and debt levels. 

The maximum loan-to-value ratio, which is the ratio of a loan to the total value of the purchased property, will stay at 80 percent. The countercyclical capital buffer rate – a tool that helps banks prepare for economic changes by ensuring they have extra money set aside when giving out mortgages – will remain at 2 percent, the ČNB says.

High interest rates in the country – hovering at about 7 percent – have caused a slump in mortgage applications nationwide in the past two years, although experts believe that gradually falling interest rates set to take place at the end of this year and the start of 2024 will increase the number of mortgage applications.

Ondřej Šuchman, mortgage manager at Komerční banka, expressed a positive outlook on the deactivation of the DTI indicator to the news site ČT24. However, he doesn't anticipate a substantial surge in mortgage sales, as most clients typically meet the maximum DTI levels already in place.

Filip Hrubý, spokesperson for the Česká spořitelna bank, shared similar sentiments, predicting increased mortgage accessibility, especially for younger clients.

Despite the relaxation of mortgage criteria, Libor Holub, Director of the Financial Stability Section at the ČNB, confirmed that the banking sector remains cautious. Holub also emphasized that the economy's subdued nature and high-interest rates will continue to limit mortgage lending conditions, mitigating the prospect of an immediate mortgage boom.

Holub also pointed out positive trends in borrowers' financial standings, highlighting a 60 percent rise in the average net income of mortgage applicants, accompanied by an increase in their financial reserves. This development reduces the risk of loan defaults.