Why do so many people still believe that banks require a 10% or 20% down payment, even when it's not actually true? This article isn't just about how much you need to put down yourself. It's mainly about how banks think about LTV and why LTV is the deciding factor in whether you can finance 80%, 90%, or even 100% of the purchase price. And believe me, most people have a distorted understanding of LTV, to say the least.
What is LTV and Why Is It So Important?
LTV stands for loan to value, which is the ratio of the mortgage loan to the value of the collateral. And that's the key phrase—the value of the collateral, not the purchase price, not your savings, and not how much you're putting down. The only thing the bank cares about is the size of the mortgage versus the total value of all properties you offer as collateral.
The Czech National Bank (CNB) only states that a bank cannot exceed a 90% LTV for applicants under 36 and an 80% LTV for older applicants. And that's it. The CNB doesn't say anywhere how much a client must contribute from their own funds. The phrase "the client must provide a 20% down payment" is a myth born from a misunderstanding of LTV.
So Where Did the 20% Down Payment Idea Come From?
It's a byproduct of a simple calculation. If you have one property as collateral, valued at, say, 10 million, and you can get a mortgage for a maximum of 80% of its value, then you simply have to put down 2 million yourself. But that's not a rule; it's just a consequence of having only one property of a specific value as collateral. The bank only cares about the LTV. I have never seen a sentence in any bank's methodology that says: "The client must contribute X% from their own funds."
For the more curious among you: there is one specific situation that dictates a client must provide a certain percentage from their own funds, but this only applies to foreigners at one particular bank.
Purchase Price vs. Appraisal: Who Has the Final Say?
Another common misconception is that LTV is calculated based on the purchase price. No, the purchase price is, at most, a reference point. What matters is the valuation from the bank's expert, commonly known as an appraiser. In practice, you'll encounter three scenarios:
- Scenario 1: Appraisal = Purchase Price. This is the standard and most common situation. The bank calculates the LTV based on this value as usual.
- Scenario 2: Appraisal is higher than the purchase price. This is less common, but it happens. And here's what follows: you're buying an apartment for 10 million, but the appraiser values it at, say, 11 million. The LTV is calculated based on 11 million, so the required down payment magically decreases, very rarely even to zero. In 2023 and 2024, I even experienced this several times with one particular bank.
- Scenario 3: Appraisal is lower than the purchase price. This is much worse. In this case, even a 20% or sometimes a 30% down payment is suddenly not enough, because the bank will lend you less than you expected.
So How Can You Finance 100% of a Purchase (Even Without Savings)?
Putting all this information together, we get to how LTV really works and how you can easily finance 100% of a purchase. Let's say you're buying an apartment for 10 million and have almost no savings. Most people would say, "Okay, that's just not possible." But that's a mistake.
Option A: Two Properties as Collateral
Do you own an apartment, or would your parents let you use their house as collateral? Great! Let's do the math:
- The property being purchased is valued at 10 million CZK.
- The second property (e.g., your parents') is also valued at 10 million CZK.
- Total collateral: 20 million CZK.
With an 80% LTV, you can borrow up to 16 million crowns. So, the 10 million for the purchase fits in easily, with plenty of room to spare. And you don't have to put down a single crown of your own money.
Option B: One More Expensive Property
Do you have an apartment or house worth, say, 12.5 million crowns or more? Sometimes, this single property is enough as collateral on its own, without needing to pledge the newly purchased one. And again, you're financing 100% of the purchase price with no down payment.
Option C: Pledging a Property with an Existing Mortgage
Even the fact that the property you want to use as additional collateral already has a mortgage on it doesn't have to be an obstacle. If the outstanding loan balance is relatively small compared to the property's value, the bank can still use it as additional collateral. This is common for people who are buying a larger apartment before they sell their smaller one. And again—no down payment is needed. It's all about the LTV.
The Most Common LTV Myths in One Place
To wrap it all up, here are the most common myths I encounter:
- Myth #1: You must have a 20% down payment.
No. You must have an LTV within the limit set by the CNB. And that's a big difference. - Myth #2: LTV is calculated based on the purchase price.
No. LTV is calculated based on the property value determined by the bank (the appraiser). - Myth #3: One property = one LTV.
No. LTV is calculated based on the total value of all properties used as collateral. - Myth #4: If a property has a mortgage on it, it can't be used as collateral.
It can, and often very easily. - Myth #5: If you don't have savings, you can't get a mortgage.
No. If you don't have sufficient value in your collateral, you can't get a mortgage.
You might think these aren't significant differences, but believe me, in practice, they are. They often determine whether a client can get a mortgage and achieve their housing goals.
A Few Final Tips
Not only can you often finance 100% of the purchase price, but sometimes even more, for example, through a non-purpose part of the loan. You can then use the extra money to furnish the new property or for anything else you like.
It might also be useful to know that even if you're over 36, some banks offer the possibility of an exception for a 90% LTV. So, if you're in a situation where this would be helpful, don't hesitate to ask your advisor.
The next time someone tells you that you need a 20% down payment, you'll know it's not that simple. Now you know that LTV is about collateral, not savings.
