Mortgage rates have skyrocketed in recent years. The biggest boom came specifically in 2021. In recent months, we have seen the average mortgage rate slowly but surely dropping again. As of June 2023, the average interest rate on new mortgages stood at 5.68% per annum. Whether it is the choice of bank, the client’s creditworthiness, the fixing period or the LTV (the ratio of the mortgage loan amount to the mortgage value of the property).
Are higher or lower interest rates better for us? It always depends on your point of view. For banks, it is definitely more attractive to have higher interest rates, as they mean higher income. However, low rates may also not be detrimental. They may attract more people to want to borrow, which will increase the demand for credit. From the client’s point of view, it is clear that they always want the lowest possible interest rate. It represents lower monthly repayments, increases housing affordability and flexibility.
What does it look like when an investor arranges a mortgage and what is his point of view? Investors are actually making a “leveraged investment”, so they are effectively taking out a home loan, but someone else is repaying it for them, and that is the tenant. If a person takes out a mortgage on their own home, it is usually out of some sort of necessity or a sense of need to “own something.” Most people don’t have much choice, and find it best to take out a mortgage on their own home even at the cost of having “blood payments” afterwards. In this sense, there is not a financial income, but a financial expense, which is often quite high. A mortgage is certainly a type of loan, but is this really the case in practice from an investor’s point of view? If one is borrowing for investment, yes, it can be more complicated to get a mortgage – stricter rules etc., but it is certainly not a financial liability for the client if the mortgage is paid by the tenant.
Let’s use Mr. Novak’s example to give you a better idea. Let’s say that he looked for 2 smaller investment apartments in Aš for a total of 2 million CZK, each worth 1 million CZK. He had saved 500 000 and took out a mortgage loan for 1.5 million. His monthly repayments are set at 10 000 including interest. He rented out the flats after the purchase and his net income from this amounts to 16 000. After 6 years he decides to sell the flats. Statistical data show that in the long term, on average, the flats in Aš grow by about 5-7% per year, so their value has risen by, say, 700 000 to 2.7 million in the meantime. If we do some calculations, we find that Mr Novák was obliged to pay 10 000 a month, but at the same time he received 16 000 net from his tenant every month, so he earned 6 000 passively every month. Although all rental income is taxable, a deduction can be taken. On an income of 72,000 per year, the client deducts 30% and then calculates the 15% tax. So he does not calculate it on the whole 72,000, but only on 50,400. He then has to pay 7 560 per year to the state on this income. The income thus works out at 64 440 per year and 386 640 CZK over 6 years, i.e. the entire period of ownership of the investment flats. This is extra money after deducting the repayments. Not to mention that after selling the investment flats he earned another 700,000 CZK, for a total of 1,086,640 CZK of passive income over 6 years. Of course, we have to take inflation into account and maybe even minor repairs to the apartments. Even so, the resulting value of the income not only preserved the value of the money, but also made Mr Novák’s future considerably more comfortable. He can continue to invest the passively earned money in the financial markets. If Mr Novák puts 6 000 CZK into regular investments every month for 6 years, his money can appreciate by a further 106 086 (at 7% per annum). In total, after 6 years of investing in real estate, including active investment on the investment markets, Mr Novák has increased his wealth by 1,192,726 CZK.
People are often surprised that many investors own several apartments but live in rentals. If you imagine that you earn what Mr. Novak did in the previous example, plus you have, say, 5 more apartments, and you invest regularly in the capital markets, it’s not surprising at all. As they say, time is money, and combined with investing in real estate and the markets, you build your financial independence over the long term. After a couple of years you can sell the flats and buy your own, no more mortgage, and you’ve basically never owed anyone anything. So if anyone still thinks that mortgages for investments are unwise, they are wrong. Even with less initial capital, you can still get involved in real estate investing. If you are hesitant about how to get started, contact us and we will be happy to guide you through the investor journey.