The Czech National Bank has the statutory power to regulate selected conditions for the provision of mortgage loans. In practice, it sets the limits of the credit indicators DTI, DSTI and LTV, which all mortgage providers must follow.
“While until the adoption of the amendment to the Czech National Bank Act in 2021, the limits of credit indicators were only recommendations for banks, today they are legally binding. The Central Bank is using this recently acquired power for the first time, with the specific levels of the upper limits of credit indicators being set by means of a measure of a general nature with effect from 1 April 2022,” adds Veronika Hegrová from the fintech startup hyponamiru.cz.
Definition of credit indicators:
- DTI (Debt to Income) – The DTI is the ratio of a mortgage applicant’s total debt to their net annual income. This ratio is used by the mortgage provider to determine whether the applicant will be over-indebted. Example: if the amount of the mortgage granted is CZK 3.5 million, the value of the DTI indicator with a net annual income of CZK 500,000 will be 7.
- DSTI (Debt Service to Income) – The DSTI indicator represents the percentage ratio between the amount of monthly repayments of all loans of the mortgage applicant and his net monthly income. Example: if the amount of monthly mortgage payments is CZK 15,000, the DSTI value for a net monthly income of CZK 40,000 would be 37.5%. The DSTI value has not exceeded the level
- LTV (Loan to Value) – is the percentage ratio between the loan amount and the value of the mortgaged property. Example: if the mortgage amount is CZK 3.5 million and the value of the mortgaged property is CZK 5 million, the LTV will be 70%. The LTV does not exceed the value recommended by the CNB.
New limits for DSTI, DTI and LTV
The central bank announced changes to the mortgage rules at the end of November last year. With effect from 1 April 2022, mortgage lenders will be required to comply with the DTI income and DSTI debt service ratio limits. CNB Governor Jiří Rusnok urged banks to start applying the limits as soon as possible and not to use the postponement of the measure to April to rush lending.
“The upper limit of the DTI will be 8.5 from April this year, with the limit being 9.5 for claimants under the age of 36. The cap on the DSTI indicator will be 45 per cent and 50 per cent for applicants below 36 years of age. The CBN is also lowering the upper limit of LTV ratio to 80 per cent. For mortgage applicants below 36 years of age, the LTV will be 90 per cent. The limits for applicants under 36 years of age apply only to loans used to purchase their own home,” says Veronika Hegrová.
The legislation allows that up to five per cent of all newly granted mortgages do not have to meet the credit indicator limits if the lender is convinced that the client will repay the mortgage in the future without problems.
Mortgage specialists from the hyponamiru.cz portal have the experience that the “ideal client” of the bank, which is, for example, an applicant with real estate in a desirable location, with higher education, who has a less risky profession, etc., is more likely to get within the permitted 5% limit (note: there may be many more parameters). Veronika Hegrová adds: “The profile of the ideal client is drawn up by each bank itself. It is up to the bank to grant an exception if the credit limits are not met. After taking into account the risk profile of the client in question, it may decide to grant this exemption.”
Reasons for adjusting the limits
According to the central bank, the banking sector as a whole returned to considerably relaxed standards in mortgage lending last year. “We last saw such relaxed standards in 2018, before income limits were first introduced. In light of this, and the persistent overvaluation of house prices, we believe it is necessary to set tighter parameters for mortgage lending, i.e. to set LTV, DTI and DSTI ratio limits at similar levels as before the pandemic began. The aim is to prevent the banking sector from becoming more vulnerable,” said CNB Governor Jiří Rusnok.
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A tenth of people will not be able to get a mortgage
Getting a mortgage in 2022 will be much more difficult for some groups of prospective borrowers. “We estimate that this year at least a tenth of potential clients will struggle to get a mortgage or will not get one at all. According to our calculations, the stricter conditions for obtaining a mortgage will affect applicants under 36 years of age in particular. Compared to previous years, mortgages will therefore be less accessible to young people,” says Veronika Hegrová.
After the tightening of credit indicators, refinancing in 2022 will also be more difficult for some Czechs. “Those who do not meet the new limits will have to stay with their current bank. If a competitor offers significantly more favourable terms than the existing bank and the client does not qualify under the new rules, it is worth considering adding another applicant to the mortgage,” adds Veronika Hegrová.
How to get a mortgage in 2022?
This year, those seeking a home loan must prepare not only for stricter conditions for obtaining a mortgage, but also for rising interest rates. According to current estimates, mortgage rates could climb to six per cent. The rise in mortgage offer rates is mainly due to the actions of the central bank, which is worried about inflation and does not hesitate to raise base interest rates rapidly in the economy. Mortgage providers must also respond to higher rates.
Those interested in a mortgage or refinancing an existing home loan should focus on building their own savings and maximizing their income in 2022. In order to qualify for a mortgage, it is now necessary to prove a higher creditworthiness to the bank than in previous years due to rising interest rates.
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