Why do so many people still believe that banks require a 10% or 20% down payment, even though that's not really true? This article isn't just about how much you need to put down. It's mainly about how banks think about LTV and why LTV is what determines whether you can finance 80%, 90%, or even 100% of the purchase price. And believe me, most people's understanding of LTV is skewed, 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: to the value of the collateral. Not the purchase price, not your savings, not how much you're putting down yourself. The only thing the bank cares about is the size of the mortgage versus the total value of all the properties you use as collateral.
The Czech National Bank (CNB) only states that a bank cannot exceed 90% LTV if you are under 36, and 80% LTV if you are over 36. And that's it. The CNB doesn't say anywhere how much a client has to put down from their own funds. The phrase "the client must provide 20% of their own funds" 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 only have one property as collateral, worth, say, 10 million, and you can only get a mortgage for a maximum of 80% of its value, then you simply have to put down 2 million of your own money. But that's not a rule; it's just a consequence of having only that one property as collateral. The bank only cares about the LTV. I've never seen a sentence in any bank's guidelines that says: "The client must contribute X% of their own funds."
For the more curious among you: there is one situation that dictates a client must provide a certain percentage of their own funds, but it only applies to foreigners at one specific bank.
LTV is calculated from the appraisal, not the purchase price
Another common misconception is that LTV is calculated based on the purchase price. Nope, the purchase price is just a reference point, at best. What matters is what the bank's expert, commonly called an appraiser, says. 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 as usual, and everything works out as expected.
Scenario 2: Appraisal is higher than the purchase price
It's rare, but it happens. And then this happens: you're buying an apartment for 10 million, but the appraiser values it at, say, 11 million. The LTV is calculated based on the 11 million, so the amount of your own funds you need magically decreases, and in very rare cases, even drops to zero. In 2023 and 2024, I even saw this happen several times with one particular bank.
Scenario 3: Appraisal is lower than the purchase price
This one is much worse. In this case, suddenly even 20% of your own funds isn't enough, sometimes not even 30%, because the bank will lend you less than you expected.
So How Can You Finance 100% of a Purchase?
And now we get to how LTV actually works in practice. 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 going to work." But they'd be wrong.
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 look at the numbers:
- Property being purchased is valued at: 10,000,000 CZK
- Second property (e.g., parents') is valued at: 10,000,000 CZK
- Total collateral: 20,000,000 CZK
With an 80% LTV, you can borrow up to 16 million crowns. That's more than enough to buy the 10 million apartment, with plenty to spare. And you don't have to put down a single crown of your own money.
Option B: One more expensive property as collateral
Do you have an apartment or house worth, say, 12.5 million crowns or more? Sometimes, this one property is enough as collateral on its own, without even needing to use the newly purchased one. And again, you're financing 100% of the purchase price with no down payment.
Option C: A property with an existing mortgage
That's not a problem either! If the remaining balance on your current mortgage 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 Myths About LTV in a Nutshell
To wrap it all up, here are the most famous myths and the real story:
- Myth #1: You must have a 20% down payment.
Nope. Your LTV has to be within the limit. And that's a big difference. - Myth #2: LTV is calculated from the purchase price.
Wrong. LTV is calculated from the property's value according to the bank's appraisal. - Myth #3: One property equals the LTV.
No. LTV is calculated from 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 very often, quite easily. - Myth #5: If you don't have savings, you can't get a mortgage.
Incorrect. If you don't have sufficient value in your collateral, you can't get a mortgage.
Maybe it seems like what I'm saying aren't major differences, but trust me, in practice, they are. They often determine whether a client can or cannot get a mortgage and, consequently, whether they can achieve their housing goals.
In Conclusion
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 want.
It might also be useful to know that even if you're over 36, some banks offer the possibility of getting an exception for a 90% LTV. So if you're in a situation where that would be helpful, don't hesitate to ask.
So the next time someone tells you that you need a 20% down payment, you'll know that LTV is about collateral, not savings.
