Mortgages will become more accessible again from January – will this get the property market moving?
In November, the Czech National Bank announced that from January it would abolish one of the indicators banks had to take into account when deciding whether to grant a mortgage loan. The DTI (debt-to-income) indicator, which expressed the ratio of a loan applicant’s total debt to their total annual net income, will be abolished. In practice, more people will qualify for mortgages. Will this help get the property market moving?
Reasons for abolishing DTI
The Czech National Bank decided to abolish DTI because higher interest rates already limit the risks associated with applicants’ income levels, and responsibility for managing these risks will remain with lenders from January. They will therefore only be required to apply the LTV (loan-to-value) limit, which expresses the ratio between the mortgage loan amount and the pledged value of the property. In other words, it is possible to borrow a maximum of 90 % of the property’s total value from a bank. However, only applicants under 36 years of age can borrow 90 % of the amount. Applicants over 36 years of age can borrow a maximum of 80 % of the total amount and should ideally have saved the remainder.
In the past, the DSTI (debt-service-to-income) limit was also applied, expressing the ratio between the monthly repayments on all loans and the net monthly income of the mortgage applicant. “DSTI was abolished as early as July 2023. One of the main reasons was that, even after property prices and inflation rose, the number of non-performing loans did not increase, so there was no need to apply this limit,” says David Novotný of the real estate company Bohemian Estates, which specialises in property management and property investment.
Developments in the property market in 2024
Novotný adds that abolishing this indicator could give the property market a modest boost next year. “A recovery in the Czech property market is expected in the second half of 2024. However, it will also depend on the level of interest rates. More residential properties will be purchased, while demand for industrial properties and office space will decline.”
5% as the new standard
Mortgage interest rates currently range between 5–6%, and while this was an insurmountable threshold for many people at this time last year, interest rate levels are now viewed differently. “The property market actually began to recover modestly during this year. The 5–6% range started to be seen as the new standard, and because no one really knew how the situation would develop further, interest in property increased. Even now, we do not know whether interest rates will fall and, if so, by how much,” says David Novotný.
On the other hand, demand for rentals will continue next year, opening up opportunities for those looking to buy property as an investment. “Your investment strategy when purchasing a property needs to be carefully considered and calculated. This is particularly important if you will finance a substantial part of the purchase with a mortgage. You need to ask what the monthly repayment will be and what monthly rent could be set. Will you be able to let the property in a way that covers all costs while still generating income? We can help our clients with this. We will identify a suitable property, negotiate a discount and can also take care of the rental itself. We can also advise whether a property has the potential to be rented out only on a short-term basis. Properties in selected locations can earn twice as much this way,” concludes Novotný on behalf of Bohemian Estates.