Mortgage rates are cheaper but the Czech market saw its weakest May in a decade

Interest rates on mortgages are back at what the were in early 2018

Raymond Johnston

Written by Raymond Johnston
Published on 17.06.2020 15:30 (updated on 17.06.2020)

The coronavirus pandemic has hit the mortgage market. This May was the weakest May in the last 10 years in the number of mortgages provided. According to Fincentrum Hypoindex, the decline in the average mortgage interest rate is accelerating.

“The average interest rate continues to fall slowly. It now stands at 2.30 percent,” Jiří Sýkora, Fincentrum & Swiss Life Select’s specialist in product management, said in a press release.

While the average mortgage rate fell by five basis points in April, it fell by nine basis points to 2.3 percent in May, returning to the level of early 2018.

Compared to April this year, the number of provided mortgages decreased by 541. Year on year, 774 fewer mortgages were provided.

“After a successful April, the impact of the coronavirus crisis on the mortgage market also manifested itself. In the number of mortgages sold, May 2020, with 6,203 units, is the weakest May in the last 10 years of Fincentrum Hypoindex’s existence. Only thanks to the record average amount of loans provided (2,657,855 CZK), the volume of loans provided is not the same case,” Sýkora said.

Compared to April, the volume of provided mortgages decreased by almost 1.34 billion CZK to 16.487 billion CZK. “Volumes stopped at almost 16.5 billion CZK, which is ‘only’ the second weakest May in the last five years. The reason was, on the one hand, reduced interest from clients, but also the fact that some banks reduced or even completely stopped providing mortgage loans,” Sýkora said.

In the last five years, lower volumes in May were provided only last year. In May 2019, people arranged mortgages in the total amount of 15.927 billion CZK, which is more than half a billion crowns less than in May this year, according to figures from Fincentrum.

Czech National Bank ČNB Board member Vojtěch Benda said in an interview with Bloomberg this week that the central bank has already done enough to support the economy affected by the coronavirus crisis and that further easing of monetary policy is now not necessary. In addition, ČNB Governor Jiří Rusnok said that further rate cuts would be a threat from the point of view of financial stability. A reduction of the key interest rate to technical zero at a meeting of the Bank Board next week is therefore not very likely.

Interest rates will probably not reach the record lows from the end of 2016, when the average mortgage interest rate reached 1.77 percent. While the largest mortgage players have made mortgages cheaper, interest rates are still above 2%.

ČSOB Group has reduced mortgage rates to 2.19 percent as part of a time-limited promotion that runs from May 18 to June 30. From Česká spořitelna, it is possible to arrange a mortgage with a fixation for five and eight years from 2.34 percent from the end of May. At the beginning of June, Komerční banka, which offers the cheapest three- and five-year fixations, started by 2.29 percent.

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Apartment for rent, 3+1 - 2 bedrooms, 105m2

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Fio banka has recently reduced its mortgage rates since June 15. It offers a mortgage with a one-year fixation from 1.58 percent, with a three-year fixation from 1.68 percent and a five-year mortgage from 1.78 percent. Last week, it cut interest rates on Air Bank’s refinanced mortgages by 0.2 percentage point to 1.99 percent.

However, even lower interest rates on mortgage loans may not save banks from a further drop in volumes, according to Fincentrum. Given that the process of arranging a mortgage can take several months and the demand for mortgages has decreased according to bankers during the quarantine period, it is possible that volumes will decrease in the coming months.

Fincentrum Hypoindex is the weighted average interest rate at which new mortgage loans for individuals are provided in a given calendar month. The weights are the volumes of loans provided. Data for the calculations are provided by the following banks: Air Bank, Česká spořitelna, ČSOB, Equa Bank, Moneta Money Bank, Hypoteční banka, Komerční banka, Raiffeisenbank, Sberbank CZ, UniCredit Bank and Wüstenrot hypoteční banka.