Have you ever gone to the bank to find out how much you could borrow for a mortgage, only to walk away unpleasantly surprised? And maybe even a bit confused about how little you can borrow and how the bank actually came up with that number? If so, and it's still bugging you, then this article is for you. Today, we'll talk about how banks look at an applicant's existing debts, what kind of liabilities affect how much you can borrow, and I'll even give you a few tips on how to improve your situation.
Why Are Banks So Strict? It's About Law and Responsibility
First, you need to understand that a bank can never provide a loan that's beyond the applicant's means. This means they always have to leave the applicant with enough disposable income to cover their living expenses and repay any existing loans. This might seem obvious, but I still encounter clients who think that having a high-value property, for example, will let them bypass this. That's not how it works. The bank always has to evaluate your debts against your income.
The bank carries a lot of responsibility because, by law, any misjudgment of an applicant's situation is its fault—with unpleasant consequences for the bank. So, don't expect any major concessions.
So, how does the bank proceed? Of course, it needs proof of your income. To do this, it pulls your credit reports, asks for bank statements, and sees everything: credit cards, overdrafts, consumer loans, other mortgages, and how you're repaying them, but also how much you spend and how big your family is.
Two Types of Liabilities: Credit and Non-Credit
First off, we need to define what credit liabilities are and what other liabilities are. This is important because credit liabilities have a different impact on the potential size of your new mortgage payment than other types of expenses.
- Credit Liabilities: This includes consumer loans, mortgages, overdrafts, credit cards, and often business loans as well. Also, be aware that this includes all installment plans for goods. So, for example, that phone you bought on a 12-month plan will be in there too.
- Other Types of Liabilities: These are personal living costs, expenses for children (whether they are in your care or you pay child support), support for a spouse, and potentially rent.
And to make things more complicated, later I'll talk about one category of liabilities that's a curious mix of credit debts and things that aren't actually loans at all. And you need to watch out for this one, because it's often an unpleasant surprise.
Mortgages and Consumer Loans: Simple Math
Let's start with the easy stuff. Mortgages and consumer loans are simply factored into your expenses based on their monthly payment amount, and they always, without exception, count towards your DSTI (Debt Service to Income) ratio.
Let me quickly remind you what that is. DSTI shows what percentage of your net income goes to loan payments. For example, if you have an income of 100,000 CZK and a mortgage payment of 20,000 CZK, your DSTI is 20%. It's an important indicator because banks cap it at a maximum, usually around 50%. Only credit liabilities are included in the DSTI (with one exception, which we'll get to later).
Credit Cards and Overdrafts: A Hidden Threat to Your Creditworthiness
Another very important category of credit liabilities is so-called revolving credit. These are credit cards and overdrafts. Their defining feature is that they don't have a fixed payment. The payment is either zero, if you're not using the credit at all, or, in the case of a credit card, it depends on the current outstanding balance.
When it comes to revolving credit, banks simplify things for themselves and, regardless of your usage, they factor in a hypothetical payment, which is usually 3 to 5% of the limit on the overdraft or credit card. So, a credit card with a 100,000 CZK limit can automatically mean a monthly expense of 5,000 CZK in their calculations.
This is often a big surprise, as many people have a credit card sitting in a drawer that they never use. Sometimes they don't even remember they have it, or they only keep it for things like renting a car when traveling abroad and don't use it otherwise. However, it shows up on credit reports, and that's why even an unused card is counted as an expense and, of course, included in your DSTI.
How to Get a Clear Picture? Credit Reports Are the Answer
If you want to find out where you stand with your credit liabilities, including your repayment history, the easiest way is to download a joint report from the banking and non-banking client information registries (BRKI and NRKI for short). You can easily get this report online at kolikmam.cz. It will tell you exactly what debts you currently have, including those forgotten credit cards in your drawer, and also how you've historically repaid them.
You'll also find out if you have any open applications. You might not even know about it. Banks often open an application for you just for inquiring about a mortgage, without telling you. If this happens, it's not a disaster. I need to dispel a common fear that any open application worsens your credit profile—that's definitely not the case. It's just good to know which bank opened the application, because you'll have to withdraw it and provide confirmation of its cancellation if you end up getting a mortgage with a different bank.
And be aware that when banks check your credit reports, they don't see information about the institutions, only about the liability itself. So it's up to you to tell the bank where the application is so they can correctly set the conditions for drawing down the funds.
Myth: You Have to Pay Off All Your Debts in Advance
This brings me to another common misconception. If you have a debt that would prevent you from getting a large enough mortgage, for example, because it would push your DSTI above the acceptable limit, you don't have to pay it off and cancel it before applying, or even before the mortgage is approved.
If you have the means to close this liability (meaning you have the money to pay it off, or it's just a pending application or a credit card you can simply cancel), you just need to inform the bank. The bank will include a condition in the loan agreement for drawing the funds, which will be to provide confirmation that the specific loan or application has been canceled. So, the mortgage can be approved right away, but you can only draw the funds after the conflicting liability has been terminated.
But be careful with credit cards. Canceling a card takes 30 days, and many banks won't be satisfied with just a cancellation request to release the funds; they'll want confirmation of the cancellation, and this can become a source of unnecessary delays.
Living Costs, Children, and Child Support: What All Gets Counted?
That covers the types of credit liabilities, so now let's move on to the non-credit ones. Everyone has minimum living expenses that the bank has to account for. If there are more members in the household, the costs increase. However, it's not a simple sum of the costs for each member, as the bank takes into account that every household has certain fixed costs regardless of how many people live there.
For example, it might look like this: the assumed monthly cost for a single person is 13,000 CZK, and for a couple living in one household, it's around 19,000 CZK. The bank also has to account for children, so the more kids you have, the more disposable income they must leave you with after deducting the payment.
It's important to know that these living costs are not included in the DSTI because they are not a credit-related expense. In other words, they don't limit the size of your payment as a ratio of your total income, but rather in absolute terms. For example, if you have an income of 40,000 CZK and a family of four, the bank might estimate your costs at around 28,000 CZK, which means you can't afford a payment higher than 12,000 CZK, even though that's only about 30% DSTI. In reality, it's unfortunately a bit stricter, as banks often add a certain buffer to the payment to account for potential future interest rate changes.
This type of expense also includes child support for children not in the mortgage applicant's care. It's good to know that if someone who is married applies for a mortgage alone (based on a notarial deed narrowing the joint property of spouses), their husband or wife is counted as an expense, even if they are not a co-applicant. The same situation occurs if you declare that you live with someone in a shared household, or as they say, you're "living together."
A Little Trick for Property Owners
And now that we know the different types of liabilities, I can't resist sharing one amusing consequence. If you already own a property and want a mortgage for another one, you are less creditworthy from the bank's perspective if you live in it. Really. When you live in it, you don't have to pay rent, but you also don't have any rental income from the property you own.
If you were to move into a rental and rent out your own property, you'd have new rental income, and the rent you pay is not a liability that's included in your DSTI. So, your rental expenses often don't significantly hurt your application. And what's more, if you then declare that the second property is for your own housing, the bank won't count the rent you're paying as an expense at all. It's a little trick that's sometimes used.
The Gray Area of Leasing: Watch Out for Unexpected Complications
Now, let's get back to those liabilities that are in a gray area. As I mentioned at the beginning, I'm talking about financial leases and operating leases. With these, the situation is more complicated, for two reasons.
- The first reason is that both of these products can be (and often are) taken out under a business ID number, meaning they are business liabilities. However, this doesn't automatically mean they aren't counted as personal liabilities. If you took them out as a self-employed individual, they will appear on your credit report under your personal identification number, and most banks will consider them part of your monthly expenses.
- The second catch applies only to operating leases. You might think, "It's a rental, so it's not actually a credit liability," and you'd be right. But operating leases are reported to the non-banking client information registries, so not only does the bank know about them, but unfortunately, it includes them in the DSTI calculation.
Be very careful with this, because from experience, canceling an operating lease can be far from easy. Even if you pay it off for the remaining period, it's a hassle to get confirmation from the leasing company that your liability has been terminated. And that makes it a problem to draw down your mortgage if canceling the operating lease is a condition for the drawdown.
Summary and Final Recommendations
So, to sum it all up and give some concrete recommendations: whenever you want to apply for a mortgage, assess your credit and other liabilities. To find out about your credit-related ones, download your credit report. Next, consider whether it's possible to get the mortgage you need in the context of your existing debts. And if not, think about whether you could pay off or cancel some of them.
If you need to cancel some liabilities, find out exactly what's involved so you know you can get it done quickly enough. An experienced mortgage specialist can help you with all of this. If you'd like help with your mortgage, you'll find a link to book a consultation with me in the video description. And yes, this is my "shameless plug."
Thank you to everyone who read all the way to the end.
