How to arrange a mortgage part 1: Verification of creditworthiness

Before applying for a mortgage, it is important to verify your creditworthiness, ie the ability to repay the loan. When applying for a mortgage, the applicant must prove his income in reality, either by a certificate of income or a tax return. For entrepreneurs, it is usually necessary to document the tax return for the last

two years.

The duration of the mortgage, which is usually concluded for ten to thirty years, is also related to creditworthiness. Shorter repayment periods lead to higher installments, while longer repayments can easily become more expensive, despite the low amount of installments. Before visiting the bank, it is also necessary to think about the condition of staying in the Czech Republic. Residents of the states of the European Union must have at least temporary residence in the Czech Republic and foreigners from third countries permanent residence.

Creditworthiness is not only paid from the applicant's income, his other loans and entries in the debtors' registers are also important. For a comprehensive credit check, it is best to use the services of an experienced mortgage adviser. He will also communicate with the bank and the cadastral office on behalf of the client, compare the mortgage offers of various banks, advise on real estate insurance and alert the client to any possible problems.

The registers indicate the discipline of borrowers in repaying loans. Banks check the late repayment of the client's debts for the last three to five years. Minor offenses are tolerated by most banks at the cost of a higher interest rate, but if the applicant has repeatedly been late in repaying in the past, he is likely to say goodbye to the mortgage. An unused overdraft or credit card can also damage.

The most famous registries:

• CRU- Central Credit Register,
• BRKI- Bank Register of Client Operations,
• NRKI- Non-banking register of client operations,
• Solus- Association for the protection of leasing and consumer credit.

Requirements of the Czech National Bank

LTV (Loan to Value) - the ratio of the loan amount and the price of the property, indicates the upper limit of the mortgage. According to the CNB regulations, the maximum permitted LTV is 90 percent. Banks are allowed to apply an exception to the rule and offer clients a loan with LTV up to 100 percent, but the amount of these mortgages must not exceed 5 percent of the volume of all mortgage loans of the institution. As for the so-called investment mortgages, the rules are even stricter. The CNB sets an upper LTV limit of 80 percent for them.

Example: LTV is 80%. In this case, the mortgage amounts to 80% of the mortgage value of the property. If the property is worth 10 million, the client has a mortgage of 8 million.

DSTI (Debt Service to Income) - the ratio of the monthly payment to the applicant's net monthly income, taking into account also the repayments of other client loans. As part of measures related to the coronavirus epidemic, the CNB lifted the maximum DSTI limit in July 2020, however, it continues to recommend that banks not provide loans with a DSTI of more than 50%.

Example: A client has a net income of CZK 40,000 and no other loans. The maximum amount of the installment that the bank will offer to the client in compliance with the DSTI 50% limit is CZK 20,000.

DTI (Dept to Income) - the ratio of the total debt of the applicant and the amount of his net annual income. The CNB also lifted the upper limit of this indicator in April last year, but recommends that banks provide loans up to a maximum of eight times the applicant's net annual income. Otherwise, the bank is at increased risk of loan default.

Complex example:

The applicant has a net monthly income of CZK 50,000, repays CZK 5,000 per month for a car loan and wants to buy an apartment worth CZK 6 million.

His net annual income is CZK 600,000. If the DTI limit is observed, the client will reach the maximum mortgage amount of 4.8 million crowns. This amount is also 80% of the property value of 6 million, so the condition for LTV is also met. To comply with the DSTI 50% condition, the client's total monthly payments must amount to a maximum of CZK 25,000. As he already pays CZK 5,000 elsewhere, the bank will offer him a maximum installment of CZK 20,000.

The client will repay the mortgage in the amount of 4.8 million with installments of CZK 20,000 per month for 20 years. The remaining 1.2 million to the value of the property will have to pay from its own resources.