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The effect of the interest rate change on the installment amount

Issued 10.11.2021

Interest rates are still sharply rising in the Czech Republic. While at the beginning of this year the average interest rate for mortgage loans was below 2%, now the rates are reaching 4% threshold.

The Czech National Bank has raised basic interest rates several times already, which is also being reflected by banks in the level of mortgage interest rates. A higher interest rate means higher loan repayment costs. The monthly annuity of a regular mortgage in the Czech Republic consists of the capital repayment and interest payment. However, what is the real difference in the amount of the monthly mortgage payment when the interest rate changes from 1.79% to 4%?

Assume a mortgage of CZK 5,000,000 with a maturity of 30 years and a fixed interest rate for 5 years. The fixed interest rate is the most common type of mortgage interest rate in the Czech Republic and allows you to determine how long we want our interest rate to remain the same when applying for a mortgage loan. At the end of the fixation, the rate may be changed.What will be the amount of the installment at the interest rate of 1.79% and the subsequent change to 4%?

At an interest rate of 1.79%, the monthly payment will be CZK 17,690. If the interest rate is increased to 4%, the monthly payment will be CZK 23,871. This means a difference of CZK 6,181.

At this point, it should be noted that in historical and local comparison, today's interest rates are far from the highest. Although rates are currently lower in the euro area, rates in the Czech Republic are not reaching their all-time high. Beside the interest rates itself, another important parameter is the fixation period, after which it is possible to refinance the mortgage loan and get a different (lower) rate. Especially during the end of interest rate fixation, it is advisable to watch the date of the expiry of this period and start resolving possible refinancing in time. If your interest rate fixation is about to end and you do not know what to do with your mortgage loan, do not hesitate to contact us.

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