Czechs with mortgage loans are suffocating high interest rates. In addition to deciding whether to finance housing with an expensive loan at all, which thousands of Czechs have put off under the current conditions, they are also dealing with the question of how to pay as little as possible on their mortgage payments. The answer may be a correctly chosen period of interest rate fixation.
A number of experts from the banking sector expect their gradual decline at the turn of the year. And at current interest rates, a long fixation could in practice mean a monthly installment that is several thousand more expensive. “In the future, we expect a decrease in interest rates, which could manifest itself to a certain extent in the framework of short and long fixations,” says Unicredit Bank press spokesman Petr Plocek.
According to Raiffeisenbank data, loans with a fixed term of more than five years have practically disappeared. Currently, the share in the bank’s portfolio is roughly two percent. “In 2021, the share of loans with a fixed term of more than five years was roughly one-fifth. That difference has shifted to shorter fixations, especially three-year ones,” explains Milan Voldřich, director of mortgage loans at Raiffeisenbank.
Bankers at Air Bank also perceive the same development, where the current share of mortgages with fixed rates for ten years is at the level of one percent. Due to the change in trend, the bank additionally added fixation for a short period to its offer.
“We noticed an increasing demand for short fixations, which is why we added them to our offer this year, for two and three years. These rates, together with the five-year rate, became dominant and gradually almost completely displaced the use of long fixations,” says Marek Richter, head of mortgage services at Air Bank.
“There is now little interest in seven- and ten-year bonds. Currently, they practically no longer make sense for the client. If I start from the assumption that no major surprises await us, then I currently see no reason to think about a long fixation. The argument of lower rates has passed, and at the current level of rates it no longer makes sense,” comments David Eim, deputy chairman of the board of Gepard Finance, on the development.
Banks still offer the option of long fixations. And even within the framework of its banking consultancy. “Bank advisors do not discourage (from long fixations). They describe alternatives, their advantages and risks to the client. The decision must be made by the client,” says Voldřich from Raiffeisenbank.
According to him, the question of convenience is subjective. Currently, on the financial market, longer fixations are cheaper than shorter ones, which is reflected in the prices of individual fixation banks. According to October Hypoindex data, the current average interest rate for one-year fixed rates is 6.43 percent. Ten-years then to 5.88 percent.
“For some, the percentage difference in the domestic budget is large, for others it is not, and they start speculating that rates will fall in two years’ time,” says Voldřich. According to him, however, there really aren’t many such clients, and the rate would have to drop by so much that what the client overpays in two extra years, he saves in the following ones.
“It’s always a matter of risk, the certainty of the same repayment for five years, or the risk that I will save, which may not happen, and on the contrary, the client may significantly overpay,” adds the Raiffeisenbank’s director of mortgage loans.
Penalty for absconding with a mortgage
Just like today for clients, so also for banks, the offer of these long fixations is more or less an unwanted service. With the expected reduction in rates and the currently invalid legislation that would allow clients who switch to another bank with a more favorable offer to be charged a fine in the form of a fee for early repayment of the loan, these loans could become more expensive for them. As a result of mortgage tourism, banks are losing their planned income from loans.
In other words, if this fee were not eventually introduced by the government, the transition of clients to a cheaper loan will continue to be easy and cheap. The client only pays for the administrative costs of the transition. According to Libor Ostatek, mortgage expert Broker Trust and Golem Finance, bank losses on refinanced loans alone in 2021 amounted to hundreds of millions of crowns.
“In the largest mortgage wave we have experienced so far in 2021, approximately 40 billion crowns were refinanced out of mortgage loans worth 450 billion crowns. Thanks to this free principle, the banks suffered an estimated loss of one hundred million,” he previously stated for SZ Byznys.
As a result of these risks, banks are threatening to increase the price of long-term fixings, which Unicredit Bank has recently done, for example, by raising interest rates on seven- and ten-year mortgages by one percentage point. The loan rate for eighty percent of the property price has now increased to 7.09 percent with a ten-year fixation. According to Hypoindex data, the average rate for a ten-year loan on the domestic market this October was at the level of 5.88 percent.
And a similar plan would be considered by other banks in the scenario where the state does not introduce a fee for early repayment of the mortgage, or its maximum is set too low. For some, the possibility of long-term fixation could also disappear completely.
“If a situation arises where clients will be able to terminate long-term contracts at any time with only a minimal fee, the question is how this will affect the motivation of banks to offer long-term contracts at all,” says Filip Hrubý, press spokesman for Česká spořitelna.
According to experts, however, in the era of expensive mortgages, this change would hardly have been noticed by anyone, as data on the use of individual fixations also show. The change will occur again at the moment when interest rates head downwards more significantly.
“If rates were to fall below, say, three percent in the future, or even lower, then long fixes would be extremely interesting. All the more so because we now have live experience with high rates,” adds David Eim, a mortgage expert.