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The Czech National Bank has new legal authority to determine the mortgage rules

Issued 02.06.2021

 The amendment to the Act on the Czech National Bank (CNB) was signed by the Czech president at the beginning of June. The CNB will thus acquire the statutory power to adjust the parameters for providing mortgage loans. Until now, the central bank could only issue recommendations which, despite their legal unenforceability, the banking institutions followed. The new changes also concern the CNB's decision-making in the financial markets.


When the amendment becomes effective, the central bank will be able to determine the key parameters that banks have to follow when providing mortgage loans. These are the indicator of the amount of the mortgage loan to the value of the mortgaged property (LTV), the indicator of the amount of the loan repayment to the applicant's total monthly income (DSTI) and the indicator of the total debt to the applicant's annual income (DTI).


The CNB will now be able to set upper limits, either for one or more indicators at a time. The CNB may impose a fine of up to CZK 10 million for non-compliance with the limits by the mortgage provider. In reality, after the law enters into force, the central bank could increase the percentage of applicant's own funds from the current 10 percent to 15 to 20 percent of the total value of the property. (Source: https://www.irozhlas.cz/ekonomika/michl-ceska-narodni-banka-urokove-sazby_2105191200_pj)  Rising rates are already starting to hinder enormous interest in mortgage loans. An increase in the co-participation in a mortgage loan could mean a significant decrease in interest in new loans.


A controversial part of the amendment appears to be the definition of a mortgage loan, where it is defined by law as a "consumer loan secured by residential real estate". However, this definition differs from the definition of a mortgage loan provided by the Consumer Credit Act 257/2016 Coll., and other related acts. The problem could arise when a property that does not serve residential purposes, such as a building plot or recreational property, is used as collateral. The question thus remains whether such properties will be subject to milder conditions or whether the same parameters will apply to them as for residential real estate.


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