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Mortgage Prices Going Down, As Banks Favour Shorter Fixed Periods

Translated by Milo Dvorak

19. 2. 2024

Business Newsletter #9

Good morning,

Let's start this week with what looks like a positive move in a market that prevents so many people's dream of owning a property from actually happening by asking to pay too much interest on their mortgage. Though surely a long way from afordable, could this be a sign that good times are coming?

Published by E15 on 18 February 2024.

At the beginning of February, the Czech National Bank lowered the base interest rate by half a percentage point to 6.25 percent. The central bank's move contributed to a gradual decrease in mortgage rates. Among the first to react was Česká spořitelna, followed by Air Bank and ČSOB, which have also lowered their rates. Other banks are currently evaluating the situation.

Mortgage banks typically respond to changes in the base interest rates with some delay, so mortgages are expected to become cheaper in the coming months. According to Martin Machala, the head of the mortgage startup Ownest, the current rate cut by the Czech National Bank had already been factored into some banks' offers since January. "It was expected. Additionally, in the week following the CNB decision, data was released showing a significant January inflation drop to 2.3 percent. Some banks probably wanted to take advantage of the positive psychological impulse," Machala said.

The top three

Immediately after the last reduction in the ČNB's base rates, Česká spořitelna lowered the interest rates on mortgage loans, affecting both Česká spořitelna's Building Savings Bank (Buřinka) and its Hypo Loan. The lowest interest rate at the bank starts at 5.39 percent for loans with a fixed period of four and five years. The reduction applies to all fixed interest rate periods, ranging from 0.20 to 0.40 percentage points.

Following suit, Air Bank also lowered its interest rates, with the most significant reduction applying to shorter fixed periods of two and three years by 0.5 percentage points. The new lowest rate starts at 4.69 percent. "In the February interest rate change, we continue the trend of favouring two-year and three-year fixed periods. The demand from our clients for short fixed periods, in connection with the growing expectation of continued gradual interest rate reductions, is still increasing," said Marek Richter, head of mortgage services at Air Bank.

Thirdly, ČSOB joins the wave of rate reductions. Interest rates on purpose-specific mortgages at ČSOB Hypoteční banka have decreased by 0.3 percentage points for one-year and three-year fixed periods, and by 0.1 percentage point for a five-year fixed period. Other banks had already lowered rates in January or early February, with some waiting for further decreases.

"We reduced mortgage interest rates at the end of January. In addition to rate reductions, UniCredit Bank now offers a two-year fixed period. For this fixed period, for purpose-specific mortgages up to 80 percent, we offer a rate starting from 5.19 percent with the establishment of repayment capability insurance," explained the bank's spokesperson Petr Plocek. "We closely monitor market developments and the ČNB's decisions," said mBank spokesperson Kristýna Dolejšová in response to e15's inquiry.

Similarly, Komerční banka, Raiffeisenbank, and Fio banka, which last adjusted their rate sheets on January 12 by 0.4 percentage points for three-year and five-year fixed periods. Fio Bank clients can now secure a rate of 4.78 percent or 4.68 percent. Moneta Money Bank has been offering mortgages since February 1 with rates starting from 4.99 percent.

Long fixed periods in the spotlight

The willingness of banks to lower interest rates is significantly less than it may seem at first glance. There are multiple reasons for this. "In addition to profit-making, banks are motivated to reflect the possibility, in longer fixed periods, that some clients may switch to another bank," explains mortgage expert Libor Vojta Ostatek from Broker Trust. It is also a response to the compromise that legislators approved, allowing banks to charge clients a maximum of one percent of the outstanding principal in case of early repayment, compared to the originally proposed two percent.

Banks want to motivate clients to choose shorter fixed periods. The intention to "shorten" is evident in the decreases in interest rates, especially for shorter fixed periods. "The trend among banks is to reduce primarily the shortest fixed periods of one or two years. Conversely, they should increase the cost or stop offering long fixed periods of seven, ten and more years. This direction of mortgage rate development can be expected in the coming months, also due to the anticipated further reduction in the ČNB's base interest rates," comments Jiří Sýkora, a mortgage analyst at Swiss Life Select.

It doesn't seem like there will be a sharp price slide any time soon. However, banks will sooner or later have to gradually react to the reduction in interest rates by the Czech National Bank, faster than in the previous year. This, according to Martin Machala, will stimulate pent-up demand. In January, according to Hypomonitor of the Czech Banking Association, the average mortgage rate accelerated its decline, reaching 5.54 percent, the lowest value since mid-2022. "For most of the year, we expect mortgage interest rates to fluctuate between four and five percent," adds Ostatek.

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