Higher living costs and high interest rates are currently not doing much for mortgages, and their early repayment will probably be more expensive in a few months. The reason is the change in the Consumer Credit Act, which was submitted to the government in mid-April. It could start paying from the beginning of next year. Part of it is also the unification of the repayment rules, which until now the banks have set up in their own way.
So-called “purposely spent costs” – this formulation is currently causing differences in how individual banks and building societies in the Czech Republic interpret the Consumer Credit Act. As a result, the fees for early repayment of the mortgage during the fixation period are set individually.
The amendment, which is now on the table of the Legislative Council of the Government, is supposed to change that. The inclusion of the proposal on the agenda of the government meeting can tentatively be expected at the end of May or the beginning of June this year. It could then enter into force on January 1, 2024.
On the one hand, the new rules expand the cases in which it is possible to repay the mortgage early without bank fees, or for which the bank can charge fees, on the other hand, they introduce a ceiling so that clients do not pay meaningless amounts. “It is good that both the client and the loan provider know in advance exactly under what conditions it is possible to repay the loan early,” adds Radek Šalša for the Czech Banking Association.
In practice, however, this means that the fees charged may increase in some banks. In addition to administrative costs, which will continue to be a maximum of 1,000 crowns, banks will also charge a portion of the interest. “Their amount is calculated as the difference between the interest paid until the end of the fixation and the reference interest that will be published by the Czech National Bank on a monthly basis,” explains mortgage specialist from FinGO.cz Jana Vaisová.
According to her, however, the client should not pay more than two percent of the principal of the loan amount that is repaid early.
The new law is also intended to expand the definition of difficult life situations, when it is possible to repay the mortgage early without fees. One of the cases is a divorce, the other is the sale of real estate. Both are subject to the condition that two years have passed since the conclusion of the mortgage agreement. So far, difficult life situations have included serious illness, disability or death.
Equal rules for clients and banks
The new rules are intended to protect not only clients, but also the banks themselves, which often lose out on early closing of mortgages.
For example, they often come across cases where the client was not in any difficult situation, but they evaluate that the interest rate on the market at that moment is lower than what is in the loan agreement. He decides to pay a fee of 1000 crowns to the bank and repay the loan during the fixation period or refinance with another institution.
“Providers of consumer loans for housing could not, in connection with early repayment, adequately and fairly take into account their financial costs caused by a possible drop in interest rates on the financial market in the period between the provision of the loan, the end of the fixation period and the early repayment,” defends the bank Šalša.
Holes in the current interpretation
According to experts, the incomplete interpretation of the current law has caused chaos in the market. In 2019, therefore, the Czech National Bank intervened in the very definition of purposefully spent costs. “She refused to consider these costs as commissions for brokering mortgages and other costs associated with providing a loan or lost profit in the form of unpaid interest in case of early repayment before the end of the fixation,” recalls Lenka Sklenářová, a lawyer from the Noerr law firm.
The Czech National Bank therefore defined purposefully incurred costs as necessary costs associated with early termination of the contract. At the same time, individual banks must be able to justify the fees. However, they will usually find out exactly how much they will pay only when negotiating with the bank or asking questions.
In the past, banks were fined for high fees. For example, UniCredit Bank faced a fine of ten million crowns for this last year, Komerční banka had to pay 7.5 million crowns and, for example, Modrá pyramida five million crowns.
When can a mortgage be paid off early without fees:
Up to 25 percent of the mortgage every year in the period of the anniversary of the signing of the contract. The entire loan can therefore be repaid in four years, regardless of the length of the agreed fixation or the duration of the loan. At the time of mortgage loan fixation. In a difficult life situation, for example the death of a client, life partner or if the client himself becomes disabled. If payment is made from the insurance that was taken out for the mortgage.
Roughly every fifth person in the Czech Republic has a mortgage. According to the latest data from the banking association, the average amount of the new ones is 2.9 million crowns. However, the mortgage market has been in a slump since the middle of last year due to high interest rates.
“The number of negotiated mortgages has reached its lowest value in the last two decades,” comments Jakub Seidler, chief economist of the Czech Banking Association.
Despite the significant drop, the March statistics show a slight improvement. Banks and building societies provided mortgages to households in the total volume of 12.6 billion crowns in March.
The volume of mortgages granted increased by 4.7 billion crowns month-on-month, which represents a 60 percent month-on-month increase. The volume and number of mortgages thus reached the highest level since the middle of last year.
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