The central bank is preparing to tighten its policy on mortgage loans as of next year, the daily Hospodarské Noviny reports. Although it is not yet clear what form the restrictions may take Czech banks will no longer be prepared to cover the full cost of the real estate due to the high risk of potential losses.
Over the past year the mortgage boom has led to a growth of prices on the Czech housing market and a subsequent drop in those prices could create potential losses for banks in the case of clients who are unable to meet their commitments. Although the bank will be left with the respective property the cost of that property may be significantly lower than the size of the original debt. During the economic crisis many banks in Europe and the United States faced a similar plight and the Czech central bank is now trying to protect Czech banks falling into the same trap.
Although the overall amount of mortgage loans covering 90 to 100 percent of the price of the property purchased only makes up around 15 percent of all mortgage loans provided by Czech banks the central bank is advising caution and is looking to other counties for inspiration. For instance in 2010 Sweden introduced a ceiling on mortgage loans which may not cover more than 85 percent of the value of the property being purchased. The move proved effective –it lowered the number of mortgage loans and increased the resilience of the financial sector.
The Czech central bank may decide to issue a similar restriction or stipulate that only one in ten loans may go over the set limit if certain conditions are met. Its decision should come as no surprise to the country’s banking institutions since the central bank has been debating a possible course of action since the summer.
According to the head of the Czech Mortgage Bank Jan Sadil the restrictions should not present a major problem either for banks or individuals taking out a mortgage loan. Most applicants already have part of the money saved up and request a loan covering less than 85 percent of the purchasing price. This is because although most banks offer the possibility of covering the full cost of the property such a loan comes with a higher interest rate attached and is far less attractive for clients. GE Money Bank, Expobanka, Oberbanka and Fio bank do not offer 100 percent mortgage loans as a rule.
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