A discount on the purchase price of the property can be more efficient than a lower interest rate

The possibility to negotiate the purchase price of real estate is currently a well known term, especially in the situation when mortgages are not getting any cheaper. Can a possible discount from the purchase price of the property compensate for the higher interest rate of the mortgage?

Properties that are being offered for sale have increased significantly in recent months, buyers can choose from many options and there is room for price negotiation.

The price growth of most real estates in the Czech Republic has stopped, in selected cases prices are falling. Flats in prefab panel houses and large, energy-intensive properties fell the most, especially in the regions. On the other hand, building plots, low-energy buildings and new buildings hold the price even during this period.If you manage to get a discount on the purchase price, this situation may even be more advantageous than buying the property at the original price with a loan with a low interest rate.

As an example, consider a purchase of an apartment with an original purchase price of CZK 5,500,000. After negotiations, the price was changed and newly set at the amount of CZK 5,000,000. In this case, the buyer will finance part of the purchase price using a mortgage. Mortgage amount is CZK 4,000,000. He will pay the remaining part of the purchase price from his own resources.

• Original price: CZK 5,500,000
• Price after reduction: CZK 5,000,000
• Discount: CZK 500,000
• Original interest rate of 3% with 3-year fixation and 30-years maturity, interest paid for 3 years: CZK 348,876
• Current interest rate of 5.59% with 3-year fixation and 30-years maturity, interest paid for 3 years: CZK 657,474
• Increase in interests due to the interest rates change: CZK 308,598

The balance of the mortgage loan will be CZK 3,741,766 after 3 years, i.e. CZK 3,831,708 in the case of an interest rate of 5.59%, so the loan balance after 3 years of repayment will be CZK 89,942 higher.

Even with an interest rate of 5.59%, in this case the client would save CZK 101,460 on the purchase of this property, because he would get a discount on the purchase price of CZK 500,000, but he would pay CZK 308,598 more in interest and have CZK 89,942 higher loan balance (i.e. CZK 500,000 - 308,598 - 89,942).