The COVID-19 pandemic has hit global financial markets and its impact is becoming evident, not only in the financial sector but also in the area of ​​debtor-creditor relations. The Czech Republic is no exception. In line with the global response, we can see initiatives being introduced across the market, coming from the Czech National Bank (CNB) as the financial market supervisory body as well as from the government and parliament.

Availability of mortgages

In recent years, the CNB has tightened limits on mortgage lending conditions in order to support the financial stability of the Czech economy and to minimize the risks of market expansion (for more information, please see our previous article).

In response to the pandemic, on April 1, 2020, the CNB relaxed its recommendations regarding the valuation of new mortgages. The Loan-To-Value ratio went from 80% to 90%. In other words, a mortgage seeker can now apply for a loan for 90% of the value of the property and therefore a lower amount of equity is required.

As part of the Debt-To-Income ratio, the CNB rescinded its recommendation that banks assess their customers against this ratio. Banks should however continue to monitor this ratio.

As of July 8, 2020, the recommendation for banks to observe a 50% level of the debt service-to-income ratio has also been rescinded, however, the recommendation to monitor this ratio also applies here.

Thanks to these CNB measures, mortgage applicants will now be able to obtain larger loans.

Postponement of monthly credit payments

The Czech Parliament has passed a law that allows debtors, whether professional or private, to defer their loan repayments for up to six months.

The law applies to loans granted by banks and other regulated entities as well as to loans granted by non-bank loan providers. It generally applies to all loans granted before March 26, 2020, with the exception of certain categories of loans such as operating leases, revolving credits, loans for the negotiation of investment instruments or loans. whose debtor was late on March 26, 2020 in paying his debt. for more than 30 days.

Since April 17, 2020, debtors have the right to request (the “opt-in principle”) that the maturity of monetary debts under a loan agreement (i.e. interest as well as the principal) is extended by the duration of the moratorium period, which may until 31 October at the latest.

In the event of postponement of the loan maturities, the duration of the related guarantee will also be extended. In addition, the interest rate during the deferral period will be capped at the repo rate plus eight percentage points (currently 9%), if no lower interest rate has been agreed. Different conditions apply to debtors, which are entrepreneurs or legal persons, for whom generally no lowering or capping of the interest rate applies. These debtors are required to continue to pay the interest initially agreed in the loan contracts.

Following the adoption of the new law, CNB statistics show that the loan moratorium was only used by 10% of clients (of which 65% unsecured consumer loans, 25% mortgage loans and 5% commercial loans).

Evolution of real estate prices and short-term prospects

According to CNB statistics, house prices have not been significantly affected by the pandemic (except in Prague, where recent data shows there has been a slight drop).

Nonetheless, the CNB sees a potential for lower prices over the next few quarters mainly with regard to commercial premises, as this sector has been negatively affected by COVID-19. As for mortgage demand, the record numbers reached in the first four months of 2020 are likely to decline in the periods to come.