Mortgage Refinancing

Mortgage Refinancing

Written by Pavel Jileček
Younique, a.s. – mortgage, insurance, loan, real estate

If you’re considering a mortgage, definitely check Mortgages.cz where you can get the very best rates in the Czech Republic for mortgages.



<CLASS=YOUNQIUE1 style=”PADDING-RIGHT: 0px; DISPLAY: inline; PADDING-LEFT: 0px; PADDING-BOTTOM: 0px; MARGIN: 0px; PADDING-TOP: 0px”>MORTGAGE REFINANCING

Market situation

The mortgage refinance market in the Czech Republic has recently gained significance. The Czech mortgage boom has matured rapidly over the last couple of years with its rapid development and stable growth commencing in 2001 and a regular year on year growth of more than 40%. Throughout the years a solid client base has been created. At the end of the year 2007 the total number of granted mortgages reached almost 265,000 as the total mortgage volume reached nearly CZK 470 bn.  Recently, local banks have started to realize the importance of the future potential of this market of “existing mortgages” and they are slowly attempting to address this market. Yet an open client-hunt is most probably held back by the policy of the biggest bank players being afraid of opening the “Pandora´s box” of refinancing. However, there can already be found a couple of smaller bank institutions pro-actively offering mortgage refinancing through their mortgage products designed especially for refinancing and bearing advantageous terms and lower interest rates.

Currently, there are many clients in the market who fixed their interest rates three or five years ago, as these fixation periods make up more than 70% of all mortgages in our country. These clients have to consider now for how long they should fix their rate for the following interest season. They are re-entering the mortgage market, and besides choosing another period for their fixed interest rate, there are also a lot of them giving serious thought to the possibility of refinancing through another bank. The moment of the expiration of the fixed interest rate is the only chance to replace the debt without paying significant penalties or pre-payment fees charged by the bank. There is quite a big difference in interest rates amongst local mortgage banks, in some places reaching up to 1% p.a. Then the total savings of the refinancing may be really significant due to the rate difference and also thanks to possible optimizing of other loan parameters (mortgage maturity, loan-to-value, rate fixation period, regular fees, etc.)

What is mortgage refinancing?

Refinancing for a home mortgage is the replacement of an existing mortgage debt with a newly arranged mortgage with (usually) another bank bearing different terms. This basically means that the client will organize a new mortgage loan with a new bank and pay off his old debt through this newly-arranged mortgage facility. Then the client continues with mortgage repayments at the new bank.

Why and when to refinance the existing mortgage loan?

Refinancing may be undertaken firstly to reduce interest costs (by refinancing at a lower interest rate), to extend the repayment time, to reduce one’s periodic payment obligations, often by taking a longer-term loan, or to reduce or alter other mortgage risks (such as by refinancing from a variable-rate to a fixed-rate loan). It is also possible to refinance the client´s own funds invested in the property to raise cash for another investment or consumption. Especially if the property value has increased over the fixed period, there is a chance to raise cash against this increase in value even if the client originally took out a 100% mortgage. This option seems quite realistic for mortgages with interest rates fixed five or more years ago.

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Several of the most important reasons to refinance an existing mortgage

· An oncoming anniversary of the fixed interest rate period is the key moment to consider refinancing possibilities. It is not wise to wait until the bank announces the rate expiration to the client with an offer for another fixation periods. Banks tend to do so quite late (perhaps intentionally), not giving enough time to arrange a refinancing facility, providing the client is not happy with their offer. It is wise to look for alternative solutions at least three months before the mortgage re-fixes, when the eventual refinancing is still doable.

· Another reason to think about refinancing is the continuing rise of market mortgage rates with rapid growth during the last few weeks.  Now the client can lock the current special low rate and draw down the refinance facility up to one year later.  This means that, at the moment, a client can sign a mortgage agreement with a new bank and his current mortgage will be replaced with the new one in up to one year´s time at the terms specified in the new mortgage agreement.  Now it is probably possible to reserve a much lower market rate than the bank will be able to offer in 3, 6 or 12 months´ time, as interest rates have been steadily on their way up during the last year.

· If the bank offers interest rates which are too high for the following fixation period, compared to what can be reached with another bank on the market, this is exactly the time to shop around for refinancing possibilities.

· Especially if the client took out the mortgage three or more years ago, there is a good reason to consider a refinancing solution. Three years ago local mortgages for international clients were pioneering their way on the market, and the terms were unfriendly and far different from what can be arranged now. The local mortgage market has matured rapidly since then and the products for international buyers have evolved and advanced significantly. Currently, it is more than probable that expats and foreign investors could refinance with better terms than in the past.

· Expats and foreigners can now extend their repayment time by taking a longer- term loan (up to 40 years maturity) and decrease the monthly repayment significantly.  Those who aimed for a buy-to-let mortgage can cover their mortgage repayment easier with a rental income.

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· Through a refinancing facility clients can replace their outstanding mortgage amount at more convenient terms, and they can also obtain a cash-out (a mortgage top-up), providing the property value is sufficient.  This way it is possible to refinance with a loan amount larger than the existing mortgage and use the cash difference for another investment or consumption.

· The clients can also get rid of their current local life insurance facility, if the previous bank required it, although the client doesn´t wish to be covered just because of the mortgage.

· Last but not least, clients do not need to declare their income again and do not need to arrange a new appraisal of the property value, providing they have the original one and it is not older than five years.

Cost of mortgage refinancing

· It makes sense to have the refinancing arranged through an experienced, independent mortgage broker working in partnership with all banks who can find the most suitable solution on the market. The client can save money and time avoiding the trouble and hassle usually involved in each refinancing process.

· Clients do not need to pay any fees to the bank for a new mortgage that represents savings up to CZK 30,000.

· Clients can use their original appraisal of the property value and do not need to arrange a new one. This can provide a savings up to CZK 10,000.

· The bank cannot charge any prepay fee or penalty. On the anniversary of the fixed interest rate period clients are allowed to pre-pay or fully repay the mortgage free of charge.

Current refinancing options on the Czech market

Lately, several Czech banks have been offering special mortgage products designed for refinancing purposes. These products include a number of discounts and benefits compared to average products designed for the new clientele. However, it is appropriate to analyze every mortgage case individually, taking into account all its aspects and specifics. Such analysis can reveal that an average product can be optimal and preferred to any special refinancing offer which is apparent in the text below. It always makes sense to assess all the parameters of the mortgage case and the entire mortgage product range on the market instead of relying on some actual promotions and the bank´s marketing. More than anywhere else, it is worth it here to use the services of an independent mortgage broker who knows all the requirements involved in the refinancing process and can quickly find an optimal solution with respect to the client´s specific financial situation and needs.

The purpose of the selected bank offers below is just informative – it can always be subject to change depending on the actual market situation and specific aspects of each mortgage case, e.g. LTV (loan-to-value), interest rate fixation period, financial situation of the client, mortgage repayment amount, personal status of the client, mortgage maturity, etc.

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GE Money Bank
· The bank offers a discounted interest rate fixed for five years: currently 5.39% p.a.
· Maximum loan to value is 85%
· Free of the bank processing fee (saving up to CZK 25,000)
· The bank doesn´t require any proof of the client´s income status, unless the new mortgage repayment is higher than 120% of the previous one
· The bank accepts the original copy of the property value appraisal unless it is older than three years (saving up to CZK 10,000)

Volksbank
Till the end of June there was available a very similar product designed for refinancing, like above with GE Money Bank. Refinancing offers in this bank are always time-limited but they are quite periodic and it can be supposed that the offer will be available again very soon. Unlike GE Money Bank, here it is possible to present the bank with the property value appraisals dated up to six years ago. Volksbank also offers discounted interest rates for mortgage maturities shorter than 10 years and the rate is possible to fix over 10 years´ time.

Raiffeisenbank
Raiffeisenbank offers a number of advantageous terms for mortgage refinancing.  Like in GE Money Bank and Volksbank, the client doesn´t need to prove his income again (unless the repayment of the new mortgage is higher than 130% of the previous one) and the clients get the lowest interest rate possible at the relevant LTV. The new mortgage is granted free of charge. The indisputable bank advantage is their extensive experience and flexible approach to expats and foreign clients.

Hypoteční banka
This bank has never offered any special terms designed for refinancing applicants who will get the same offer as new clients. Yet Hypoteční banka is often a hot candidate for refinancing, as they typically provide the lowest interest rates on the market and currently the bank doesn´t charge any mortgage processing fee. If the client doesn´t mind declaring his/her income to the bank again and can organize a new appraisal of the property value, this bank may represent the most suitable alternative for refinancing. Besides Raiffeisenbank, Hypoteční banka has proven-experience in serving expats and international clients with Czech mortgages, offering the most advanced products designed for this type of clientele.

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Pavel Jileček  is a Director of the financial consulting firm, Younique. He can be reached at pavel.jilecek@younique.as.

Younique, a.s. – mortgage, insurance, loan, real estate

 


Important Disclaimer: The specific values provided in this article were accurate at the moment of its creation.

If you’re considering a mortgage, definitely check Mortgages.cz where you can get the very best rates in the Czech Republic for mortgages.

 


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