Fixing / non-fixing and the Czech mortgage market in 2024

The Amendment to the Consumer Credit Act will come into effect on September 1, 2024. What impact does this have (and will have) on the mortgage market?

The text below summarizes the current situation and the impact on the mortgage market in the Czech Republic.

Historical development
In December 2016, a new law on consumer credit came into effect, which specified that in the event of early repayment of the mortgage, either from one's own money or when refinancing the loan to another bank, banks may charge so-called "purposeful costs". This term has become a phenomenon, and to this day no one knows exactly what it means. Some large banks interpreted the interpretation in their own way and charged their clients tens of thousands CZK of fines for early repayment of the mortgage. Then the court and the Czech National Bank stepped on them, the clients won the disputes and the banks received millions CZK in fines. It was clear that there would have to be an amendment that would determine how much banks are allowed to charge for early repayment during the fixation period. At the time of rising interest rates, it did not bother anyone much, and in recent years the government of the Czech Republic was in charge of other topics than the purposefully spent costs of mortgages. However, the trend is turning, interest rates are starting to fall, and the banks wanted to be clear in order to prevent so-called mortgage tourism, i.e. that clients will change banks at every minor drop in interest rates.

Months of haggling and lobbying
Passionate debates on the topic of how much costs are still humane and how much is already too much and just the "gluttony" of the banks. Long debates in the Czech government and in narrower circles gave rise to the Amendment to the Act on Consumer Credit, which defines and unifies this issue across banks.

Amendment to the Consumer Credit Act
Here are the main points of the already valid amendment: 

• The amendment is valid from January 1, 2024
  
• The amendment is effective from September 1, 2024
• The Czech National Bank will determine the so-called reference rate, which will be used to calculate purposeful costs from September 1, 2024
• Purposeful costs are 0.25% for each year started until the end of fixation, max 1% of early repayment
• The amendment only applies to new mortgages or existing mortgages with a newly negotiated fixation after September 1, 2024

Real impact on the mortgage market in the Czech Republic
Mortgages agreed until August 31, 2024 will therefore be valid "as before" and will not be subject to the above-mentioned conditions for early repayment. In practice, this means, with a bit of exaggeration, that the fixation will be binding only for the banks and the client will be able to do (almost) whatever he wants with the mortgage, whether he has a fixation for 3 years, 5 years or longer. A simple example for better understanding:

You arrange a mortgage, e.g. in February 2024 with an interest rate of 5.29%. The new rules do not apply to you, so basically at any time, regardless of the length of the fixation, you can notify the bank that you are leaving for another bank and will pay off the loan early. If the rates were to drop by a percentage to the level of 4.29%, you can leave the bank without penalties and refinance the loan elsewhere.

However, it pays to negotiate with your current bank first. Banks are aware of this specific situation, and leading mortgage providers have already said that they would like to offer adequate conditions to clients who turn to them even during the period of fixation, in order to retain these clients.

Summary
I dare say that in the coming months it will be even more important to have an experienced mortgage broker on your side, who is in daily contact with banks and will be able to secure you in the event of an expected drop in interest rates, e.g. already in the autumn or spring of next year year, more favorable conditions for your new mortgage, even if you have a fixation for 5 years. So keep in touch with your experienced mortgage broker and he will be able to secure suitable conditions for you at your existing bank as well.

If this mechanism and the current situation seem confusing and unclear to you, don't worry, even people in the field get lost in it. This is really a unique situation that the mortgage market got into after the new Consumer Credit Act came into effect in 2016. When you contact us, we will explain everything directly to your specific situation.

Mortgage rates are falling, clients have an ace up their sleeve thanks to the delayed effect of the amendment to the law, and real estate prices have fallen at least a little in the last year or two (depending on the region). These factors indicate that it can be advantageous to buy real estate in this period, because real estate prices are expected to rise again this year, practically across the entire Czech Republic.