New Rules for Mortgage Eligibility: Understanding the Criteria You Need to Meet
As of April 1st, 2022, the Czech National Bank has implemented new regulations under which banks can only provide mortgage loans to clients who meet certain criteria.
These are known as DSTI (Debt Service to Income), DTI (Debt to Income) and LTV (Loan to Value). On the website of the Czech National Bank (CNB) it is stated that:
„The CNB is lowering the upper limit of the LTV (loan-to-value) ratio to 80% (90% for applicants under 36 years of age). The limit for the DTI (debt-to-income) ratio, which expresses the total debt of the applicant as a multiple of their net annual income, will be 8.5 (9.5 for applicants under 36 years of age). The limit for the DSTI (debt service-to-income) ratio, which represents the proportion between the total monthly debt repayment of the loan applicant and their net monthly income, will be 45% (50% for applicants under 36 years of age)."
Let's break down each of these criteria and see how they impact an applicant's ability to obtain a mortgage loan.
LTV (Loan to Value)
The client has a property worth 5 million CZK, on which they have a mortgage of 4 million CZK. The amount of the mortgage of 4 million CZK represents 80% of the value of the property 5 million CZK, which means that the LTV is 80%.
A common mistake I hear from my clients is that they think the LTV ratio is directly related to the cost of the property they're buying. It's important to understand the difference between LTV and LTC (Loan-to-Cost).
For example, a client or their parents own a property that can be used as collateral for a mortgage, which means they don't need the typical 20% down payment. Say the client is buying a property for 5 million CZK and their parents own a property valued at 3 million CZK.
In this case, the client can calculate their maximum mortgage amount as a percentage of the total value of both properties (5 million CZK + 3 million CZK = 8 million CZK), which is 80% of 8 million CZK = 6.4 million CZK. The purchase price of the property (5 million CZK) is lower than the maximum amount (6.4 million CZK) for 80% LTV, which means the client can finance the entire purchase price without having to put any of their own money down.
In this case, the LTC would be 100% (no need for own resources) and the LTV would be 62.5% (5 million CZK purchase price compared to 8 million CZK value of both properties). This can be an elegant solution for clients who don't have the typical 20% down payment saved.
And don't worry about the parents, after a few years a portion of the loan will be paid off, and the increase in property prices will help balance the apartment out of the mortgage. So the situation is newly tightened for many applicants, but often relatively easily solvable.
DTI (Debt to Income)
This indicator tells us and also limits the maximum loan amount that a client or household can have as a multiple of their annual income.
DTI of 9.5 means that a client's total debt cannot exceed 9.5 times their net annual income. If someone is employed and their net salary is 50,000 CZK, then their loan cannot be larger than their annual income (50,000 * 12 = 600,000) x 9.5. Therefore, the client can qualify for a loan of up to 5.7 million CZK.
DSTI (Debt Service to Income)
If a client is paying back their debt in the most common way, through an annuity with a fixed interest rate, they will have a fixed regular monthly payment. This payment cannot exceed a certain percentage of the client's monthly income.
This parameter is the most problematic. Unlike the others, its value is affected by the interest rate at which the client's mortgage is provided. The higher the interest rate, the higher the payment will be, and the more restrictive it is to comply with the 45% or 50% DSTI. How restrictive?
A client with an income of 100,000 CZK and is under 36 years old must comply with 50% DSTI. When interest rates for mortgages were around 2% per year, the client could qualify for a mortgage of around 13 million CZK with a term of 30 years. Today, with interest rates around 6% per year, due to this parameter, the same client can only qualify for a mortgage of around 8 million CZK.
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