The CNB’s recent decision to lower the base interest rate by half a percentage point to 5.75 percent will have a significant impact on the mortgage market. In particular, this lowering will result in a drop in mortgage interest rates, which could in turn spur an increase in home purchases as the state works to promote home ownership.
Over the past year, interest rates set by the CNB were hovering around 7 percent, discouraging potential buyers and contributing to a near-record drop in mortgages. The first quarter of last year marked the lowest point in apartment purchases in seven years. In response, the CNB began reducing interest rates at the end of the year, reaching the lowest level since June 2022.
Lower mortgage rates make it easier and also more affordable for consumers to buy a house. Consequently, it is expected that more and more people will negotiate and refinance their mortgages as a result of this cut, as this move will result in lower monthly installments. The most significant impact is expected in the capital, where demand for mortgages is highest due to high real estate prices. Specifically, in Prague, for a customer with a loan of 3,850,000 CZK, a 0.3 percent reduction in interest rates could result in more than 700 CZK a month saved, while in the rest of the Czech Republic, a similar drop in rates would result in a 577 CZK reduction in the monthly payment.
Mortgage loans will become more advantageous again, thus prompting households to consider them as an option for financing the purchase of their home.
Looking at the past three years, fewer and fewer people have opted for a mortgage, and the number of new contracts declined by 17 percent year-on-year due to the high interest rates on loans. However, with the CNB cutting interest rates, mortgages have also become more affordable, and the market has already begun to react positively. As a matter of fact, the volume of new loans granted in the period from March 2023 to February 2024 reached 136 billion CZK, compared to only 127 billion in the same period last year.
In addition, the latest statistics released by the Hypomonitor of the Czech Banking Association, which is in charge of monitoring developments in the real estate sector, confirm the growth of the mortgage market. In February, in fact, banks and building societies disbursed real estate loans totaling 15.8 billion CZK to households, registering a 21 percent increase in the volume of mortgages compared to the previous month.
Optimizing mortgage conditions amidst CNB rate forecasts
Currently, the conditions for applying for a mortgage loan are undoubtedly favorable, but they may improve further by the end of the year.
Despite the CNB’s latest move, banks currently do not seem inclined to cut loan rates quickly, opting instead for a more gradual approach. The main reason behind this decision lies in the fact that as interest rates continue to fall, an increasing number of customers may decide to refinance their loans, providing additional costs for banks.
However, with the prospects of further interest rate cuts by the CNB, the benchmark rate is expected to fall to around 4 percent by the end of 2024. At that point, banks will have no choice but to cut their interest rates during this year.
To date, the Swiss Life Hypoindex, which monitors the average mortgage rates offered by financial institutions in the Czech Republic, indicates that the current average rate for commercial mortgages is around 5.6 percent and it is in line with the reduction in CNB interest rates.
Effects on real estate prices
Analysts agree that prices in the Czech real estate market have already bottomed out due to low demand for property purchases in the past year and that they are expected to continue rising during 2024.
The fall in interest rates will therefore act as a further support for demand and consequently for rising prices, so the optimal time to buy property is now.
Indeed, prices of flats for purchase in Prague increased by 6% in the last quarter of 2023, just after the CNB removed the first major obstacles to accessing mortgages in the country, and analysts expect a further increase in flat prices in the capital of around 5% this year, while prices in the other Czech regions could be slightly lower.
Sources: https://www.expats.cz/, https://www.seznamzpravy.cz/
