Planning for own housing is a significant step in the lives of many people. For most of us, purchasing property is one of the crucial financial investments we will ever make. In order to fulfill our dream of owning our own home, it is often necessary to get a mortgage. But what exactly is a mortgage and how can you get financing for your future home?
We have already discussed mortgages in one of our previous articles. This time, it won’t be from an investor’s perspective, but rather for own housing. There are several types of mortgages. At the same time, there are several options for obtaining a mortgage and also how to use it. A mortgage loan is essentially a housing loan that always requires collateral in the form of property. In case you encounter difficulties with repayment during the mortgage term, the bank has the right, thanks to the mortgage lien on the property, to foreclose on the property. Specifically, when taking out a mortgage for own housing, it depends on whether you plan to buy a flat under personal ownership, cooperative or municipal housing, or a flat in a development project that is still under construction.
People often use mortgages to purchase a flat under personal ownership. In this case, the purchased flat serves as collateral for the bank providing the mortgage. Legally, the seller has the obligation to ensure that the flat is in perfect condition and there are no legal defects that could complicate the sales process (such as easements). There are various factors that could hinder the approval of the mortgage, such as the existence of an execution registered on the flat or the presence of preemptive or lease rights of a third party.
It’s also not uncommon to buy a flat owned by a cooperative or municipality. However, cooperatives or municipalities often do not provide the option to sign a mortgage agreement, which can be a hindrance in obtaining a mortgage. Banks usually require the mortgage to be secured by real estate. One way is to use a pre-mortgage loan. It is used when the transfer of ownership of the flat to personal ownership is approaching, and when the transfer is completed, you can switch to a standard mortgage after pledging the flat with the bank. Interest rates in this case are usually higher than for mortgages secured by a flat under personal ownership. Another way to secure a mortgage is with another property. You can choose a property that is already in your personal ownership as collateral. For example, a flat, house, land, etc.
When purchasing a flat in a building that is still in the development process, it is also possible to obtain a mortgage loan. However, it is necessary to provide the bank with information such as who is responsible for the construction of the residential building, who will conduct a thorough assessment of its reliability, etc. It should not be difficult to obtain a mortgage for a flat under construction with reputable developers. After reserving the chosen flat, a future purchase agreement is concluded with the developer. Subsequently, once the construction is completed, you will sign a purchase agreement for the flat with them and begin to draw down the mortgage loan.
Let’s go back to the mortgage for a flat under personal ownership and take a closer look at it with a specific example. Imagine you have a 2+1 flat, 65 m2, priced at 7,500,000 CZK, and you provide 20% from your own resources (LTV 80%). LTV is the ratio of the property pledged to the loan you obtain from the bank. Nowadays, it’s no longer possible to get a 100% mortgage; you need to have at least 10%, ideally 20-30%, from your own resources. If you don’t have sufficient financial resources, you can use another property as collateral, which can also be used if you have the finances but want to keep them for your financial reserve. Let’s return to our model example with your monthly budget for repayments being 35,000 CZK.
Variant 1: Loan of 6,000,000 CZK, mortgage rate 5.5% p.a. => approximately 34,500 CZK monthly installment.
Variant 2: Loan of 6,000,000 CZK, mortgage rate 4.9% p.a. => approximately 31,500 CZK monthly installment => 3,000 CZK extra per month.
You go to the bank for a loan and even though you’ve been a client for several years, they offer you an interest rate of 5.5% p.a. You’re not satisfied and inquire elsewhere. There, they offer you 4.9% p.a. At first glance, it may not seem like a significant difference, as both rates fit into your budget. However, when you look at the mentioned variants above, in variant no. 2, you’ll have approximately 3,000 CZK extra compared to your budget. You can use these 3,000 CZK for regular investing. If you maintain this throughout the entire mortgage repayment period, let’s say 30 years, you could accumulate a decent financial reserve, ranging from 4-4.5 million CZK. Alternatively, you can use the passively earned money to repay the mortgage earlier by 12-14 years. Therefore, it’s very practical not to just spend the saved 3,000 CZK but to use it for concurrent mortgage repayment along with regular investing.
Are you currently dealing with a mortgage situation? Are you planning to buy a new home in the near future and are interested in a mortgage for own housing? Are you intrigued by the combination of a mortgage and regular investing? Feel free to contact us for an individual consultation, or sign up for one of our courses to learn much more. We look forward to hearing from you!