Mortgage – Frequently Asked Questions and Answers, Part 2.

Read also the first and third parts of this series.

In part one, you’ll learn how to sell a mortgaged property, how a renovation mortgage works, and whether and why you need property insurance to get a mortgage.

The third part looks at the possibility of buying a house on hire purchase without a mortgage. You will also learn what conditions you need to meet to get a mortgage for a property. We will also answer questions about the condominium mortgage and the possibility of a mortgage without or with a mortgage on another property.

Is there a non-bank mortgage for buying a property?

Yes, you can indeed take out a non-bank mortgage. It is offered by non-banking companies and is not special-purpose (so you can use it for anything and you don’t have to prove the purpose of the money), but just like a conventional mortgage, with a non-banking mortgage you pledge the property.

The advantage of a non-bank mortgage is that it has much less strict conditions than a conventional bank mortgage. Often you may not have sufficient income, you may be in foreclosure or have a record in the debtors’ register. Another advantage is the speed of setting up – you can get a non-bank mortgage in just a few days after you apply.

However, there is a big BUT. Non-bank mortgages can be offered by fraudulent companies with non-transparent terms. Often the interest and penalties for default are also much higher than with banks. Non-bank companies will also give you a lower loan relative to the value of the property (up to 90% of the appraised value of the property for a conventional mortgage, whereas the level for a non-bank mortgage is between 50% and 70%). A non-bank mortgage also carries the risk of refinancing and hidden fees.

How does a mortgage on a property in insolvency or foreclosure work?

Properties that are in foreclosure are often offered at auction at better prices than properties on the conventional real estate market. These auctions must be published on the Auction Portal, which is operated by the Executor’s Chamber of the Czech Republic.

The price of the property is estimated by a court expert and the starting price at the auction is determined on the basis of this price. It corresponds to 2/3 of the estimated price and if the property is not sold in the first round of the auction, the starting price is reduced. Basic information about the auctioned property must be published. This includes the time and place of the auction, the object of the auction and accessories, the starting price, the lowest possible bid and other conditions for participation in the auction. In order to take part in the auction , you must pay an auction security, which will be returned in full if the auction is unsuccessful. If you win the auction, you have a set period of time to pay the full amount.

You can take out a conventional mortgage on the auctioned property, but it won’t be entirely straightforward. You can apply for one after you win the auction. You have about 20-30 days to apply for a mortgage before you have to pay the full price of the auctioned property. Another problem is the uncertainty of whether you will be able to get a mortgage and, if so, whether the amount will be enough to cover your bid. For these reasons, you may find a forward mortgage or a forward mortgage more advantageous.

Pre-mortgage and forward mortgage

A forward mortgage loan is not secured by the property. It is usually valid for one year and once it expires, you need to refinance it into a conventional mortgage secured by the property. A forward mortgage loan also usually has a maximum value (usually up to CZK 5 million). You can apply for a pre-mortgage loan after the property has been auctioned. You will need to submit a final order of attachment and the auction decree.

Another option mentioned is a forward mortgage or mortgage without a property. This involves arranging this type of loan with the bank before you have a clear idea of what kind of property you are going to buy with it. You usually have up to three years to do this and once you have chosen a property, this mortgage becomes a conventional mortgage up front. Beware though, should you not get the property by the specified time, you risk heavy fines.

Can I take out a mortgage on a commercial property?

Are you setting up a limited company or have you expanded your business and therefore need your own premises but lack finance? Alternatively, have you looked at a beautiful house or flat but it is currently approved as non-residential space? There is a solution here.

The mortgage is for housing purposes and not for business purposes. You can still take it out for commercial premises under certain conditions. The first option is that only a portion of the property will be used for business purposes (specifically 49% or less) and the larger portion (51% or more) will be used as residential space. This option is thus suitable, for example, when buying a house connected to a workshop.

However, if you want to buy purely commercial premises, then you will not get a mortgage to finance it. However, there is a trade mortgage for these purposes. This is not so different from a conventional mortgage. Interest rates are usually similar to conventional mortgages, as are your minimum deposit and the repayment period. The terms and conditions under which you get the mortgage are also usually the same.

If you are in a situation where you have found your dream property, but it has been approved as a non-residential property, a conventional mortgage is the best solution. You can take this for the purchase of the non-residential space and the current redevelopment. However, there may be a problem with the bank’s willingness. Commercial premises are not worth as much as residential premises, so they may want to mortgage another property. You must also have the approval of the local building authority for the re-development.

How does early repayment of the mortgage work when I sell the property?

If you are going to sell a property with a mortgage, you may want to choose the early repayment option. This will make it easier to sell the property and will also make the whole process quicker and easier. Alternatively, you may have raised a larger sum of money and want to use it to pay off the mortgage to get rid of the fees. So how does this early mortgage repayment work when selling a property?

If you took out your mortgage after 1 December 2016, or if your mortgage was remortgaged after that time, you will not have to pay any early repayment penalties. The only thing you will have to pay is the purpose incurred costs, which are the costs of the administration you create for the bank with the early repayment of the mortgage. This includes the salary costs of the staff who process the early repayment of the mortgage, Land Registry fees, notary fees, postage, telephone charges and office costs (printing etc).

If you have an older mortgage or if the fixation has not been changed, the bank may charge you a penalty for early repayment. This penalty can be up to 0.25% of the outstanding amount for each year remaining on the mortgage, up to a maximum of 1% of the outstanding balance. If you do not insist on repaying the full amount immediately, you can take advantage of the statutory option to repay 25% of the total amount each year without penalty. Another option is to meet the reasons for free early repayment of the mortgage. These include, for example, a difficult life situation.

Summary

A non-bank mortgage can be obtained without proof of purpose, with less stringent conditions than banks, allowing even people with a foreclosure or a record in the debtors’ register to be financed. The advantage is fast processing, but the disadvantages are higher interest rates, stricter penalties for non-repayment and lower LTV ( 50-70% compared to 90% for banks). The non-transparent conditions of some providers are also a risk, so consultation with a specialist is recommended.

Foreclosed properties are sold at auctions where an auction security is required. A foreclosed property can be financed with a mortgage, but this can be problematic due to the short timeframe for payment. An alternative is a pre-foreclosure loan or forward mortgage, which allows financing before the property is foreclosed.

For commercial properties, a mortgage can be used if at least 51% is used for residential purposes. Purely business premises can be financed with a trade mortgage. If the property is approved as a non-residential premises, it can be converted, but the bank may require additional security and approval for re-approval.

Early repayment can be used when the property is sold with a mortgage. It is penalty-free for mortgages taken out after 1 December 2016, but for older mortgages the bank may charge up to 1% of the outstanding amount. Up to 25% of the mortgage can be repaid each year free of charge, or the mortgage can be repaid without penalty in the event of a serious life situation.

Read also the first and third parts of this series.

In part one, you’ll learn how to sell a mortgaged property, how a renovation mortgage works, and whether and why you need property insurance to get a mortgage.

The third part looks at the possibility of buying a house on hire purchase without a mortgage. You will also learn what conditions you need to meet to get a mortgage for a property. We will also answer questions about the condominium mortgage and the possibility of a mortgage without or with a mortgage on another property.