New law about consumer loan comes to effect today

Today, the rules under the new Consumer Credit Act start to apply, which significantly changes the conditions and the provision of mortgage loans in the Czech Republic. What does the new law bring?


Higher interest rates

Given the conditions under the new Mortgage Credit Act, many banks have decided to increase interest rates on mortgage loans. Historically lowest interest rates are now thing of the past, at least for this year, and most banks have increased interest rates by 0.30% - 0.60% pa.


Greater administration

As is often the case with the new law, it introduces a higher administrative burden and greater pressure on the part of banks to check and scrutinize new loan applicants. It may so happen that banks will require more evidence to verify the client's income and expenditure, and clients will take one to two extra forms to fill in, when signing the loan application.


APR each time differently

The banks' obligation to report on the basic parameters of the mortgage loan, including the APR (annual percentage rate of charge), could give rise to the hope that mortgage loans and their benefits could be more easily compared. Unfortunately, this will not be the case and the indicator of the APR can not be a guideline either, as some banks will treat this indicator conservatively, and some fees that are not directly related to the mortgage loan will be counted in the APR. Other banks will be more daring and these charges to the APR will not be included. The methodologies of individual banks for establishing the APR will thus vary and their comparison will be somewhat misleading, as the indicator will be based on different data.


Supervision of mortgage brokers

Mortgage intermediaries, or brokers, will be subject to the supervision of the Czech National Bank. They must be kept in a new register with the CNB and they are expected to have a professional examination and a regular annual fee. These criteria may lead to several brokers who have mortgages like hobbies ending, which is good for the expertise and quality of our mortgage market. In this case, then the introduction of this regulation, control and testing is the right direction, which will lead to higher market expertise. Too many changes are not expected, but as a first step we can see this news to be positive.


Extra repayments and early repayment

Extraordinary repayments , which are free of charge on the annual anniversary of the contract, can add up to 25% of the amount of the loan. This is one of the biggest benefits of the new law for consumers, ie clients of banks. At the same time, penalties for early repayment will be considerably reduced and the bank will be only able to charge maximum interest for loans less than 24 months until the end of the fixation period. After 24 months the amount of the penalty will be limited to 1% of the value of the loan, maximum of CZK 50,000. This is a really big difference compared to the current practice where some banks charged up to 10% of early repayments. In the case of early repayment of the loan of CZK 2.5 million, until now, consumers have been paying penalties of up to a quarter of a million crowns (!) Moreover, in the case of early repayment of the loan in difficult life situations, such as death, disability or long-term illness, one of the participants, the early repayment will be comepletely free of charge.


Summary

The new law introduces a number of innovations, both for clients, banks, and intermediaries. We will be able to see the impact of the new law in the coming weeks, when the first clients will be dealt with under these new conditions. However, there is definitely nothing to worry about because banks have been carefully preparing for this change a few months in advance.