Mortgages – Frequently Asked Questions and Answers, Part 2.

Be sure to read the first and third installments of this series as well.

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

The third part focuses on the option of buying a house on an installment plan without a mortgage. You’ll also learn what requirements you must meet to get a mortgage for land. We’ll also answer questions about mortgages for cooperative apartments and the options for mortgages without real estate collateral or with another property as collateral.

Quick Overview:

• You can pay off your mortgage early at any time, but the bank may require you to reimburse certain costs in some cases.
• The mortgage interest rate lock determines how long the bank will maintain the agreed-upon interest rate; once the lock period ends, you can usually switch banks easily.
• Mortgage refinancing means replacing your current loan with a new one, often from a different bank.
• Under certain circumstances, a mortgage can also be used to finance a property purchased at auction or a partially commercial property.
• If you’re having trouble making payments, it’s best to start negotiating with the bank as soon as possible, before your debt grows too large.

Are you buying or selling a property that is encumbered by a mortgage? Have our attorneys review the purchase agreement, the mortgage lien, and the sequence of steps to ensure that the property transfer and loan repayment proceed safely.

Are there non-bank mortgages available for buying real estate?

Yes, you can indeed take out a non-bank mortgage. It is offered by non-bank companies and is not restricted to a specific purpose (so you can use it for anything and do not have to document how the money will be used), but just like with a traditional mortgage, you must pledge the property as collateral for a non-bank mortgage.

The advantage of a non-bank mortgage is that it has much less stringent terms than a traditional bank mortgage. Often, you don’t need to have sufficient income; you can be subject to debt collection proceedings or have an entry in the debtors’ registry. Another advantage is the speed of processing— you can obtain a non-bank mortgage in as little as a few days after submitting your application.

However, there is a big BUT. Non-bank mortgages may be offered by fraudulent companies with non-transparent terms. Interest rates and penalties for non-payment are also often significantly higher than those charged by banks. Non-bank lenders will also provide you with a lower loan-to-value ratio (for a traditional mortgage, this can be up to 90% of the appraised value of the property, while for a non-bank mortgage, the ratio ranges from 50% to 70%). Furthermore, a non-bank mortgage carries risks related to refinancing and hidden fees.

From legal practice, we know that the problem often lies not only in the interest rate but also in the terms hidden in the contract —such as high penalties, short deadlines, or the method of securing the debt. When it comes to non-bank financing, we therefore recommend not evaluating the contract based solely on the monthly payment, but reviewing it in its entirety before signing.

What happens if you don’t pay your mortgage?

A single late payment usually doesn’t mean you’ll immediately lose your property. However, if you fail to make payments over an extended period, you’ll fall into arrears, your debt may grow, and the bank will begin to urge you to resolve the situation. If you continue to default, the bank may, under the terms of the contract and the law, demand repayment of the debt and subsequently seek satisfaction from the mortgaged property.

If you already know you won’t be able to make a payment, contact the bank before the due date. If you act in time, you can sometimes negotiate a change to the repayment schedule, a deferral, or another solution. Ignoring the bank’s requests usually makes the situation significantly worse.

Are you involved in a dispute over your mortgage, facing debt collection, or dealing with a property lien? An attorney can review your contract and explain what options are available to you in your specific situation.

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

Properties subject to foreclosure are often sold at auction at more favorable prices than those on the traditional real estate market. These auctions must be published on the Auction Portal, which is operated by the Chamber of Bailiffs of the Czech Republic.

The property’s value is determined by an appraisal conducted by a court-appointed expert, and the starting bid at auction is set based on this value. The starting bid is set at two-thirds of the appraised value, and if the property does not sell in the first round of the auction, the starting bid is subsequently reduced. Basic information about the property being auctioned must be published. This includes the time and place of the auction, the subject of the auction and its appurtenances, the starting price, the minimum bid increment, and other conditions for participating in the auction. To participate in the auction, you must pay an auction deposit, which will be refunded in full if you do not win the auction. If you win the auction, you have a set period of time to pay the full amount.

You can take out a standard mortgage on a property you’ve won at auction, but it won’t be entirely straightforward. You can apply for the mortgage after you win the auction. You’ll have about 20–30 days to finalize the mortgage before you have to pay the full price of the auctioned property. Another potential problem is the uncertainty of whether you’ll even qualify for a mortgage and, if so, whether the loan amount will be sufficient to cover your winning bid. For these reasons, a pre-mortgage loan or an upfront mortgage might be a better option for you.

When buying at auction, the greatest risk lies in the timing of each step. Prospective buyers sometimes assume they’ll start arranging financing only after the auction is closed, but they may then discover that the bank won’t provide the loan in the required amount or quickly enough. That’s why it’s a good idea to explore your financing options before the auction itself.

Pre-Mortgage Loan and Upfront Mortgage

A pre-mortgage loan is not secured by real estate. It is typically valid for one year, and once it expires, it must be refinanced into a standard mortgage secured by real estate. A pre-mortgage loan also generally has a maximum amount (usually up to 5 million crowns). You can apply for a pre-mortgage loan after winning the property at auction. You will need to submit the final auction award decision and the auction notice.

Another option mentioned is an “upfront mortgage,” also known as a mortgage without a property. This involves arranging this type of loan with the bank before you have a clear idea of what property you’ll use it to purchase. You usually have up to three years to do this, and once you choose a property, this pre-purchase mortgage becomes a standard mortgage. Be careful, though—if you don’t find a property within the specified time frame, you could face hefty penalties.

Can I get a mortgage for a commercial property?

Are you starting a limited liability company (s.r.o.) or has your business expanded, so you need your own space but lack the funds? Or perhaps you’ve found a beautiful house or apartment that’s currently zoned as non-residential space? There is a solution.

A mortgage is intended for residential purposes, not for business purposes. Even so, under certain conditions, you can still take out a mortgage for commercial space. The first option is that only a portion of the property will be used for business purposes (specifically, 49% or less), while the larger portion (51% or more) will serve as residential space. This option is suitable, for example, when purchasing a house with an attached workshop.

However, if you want to purchase purely commercial property, you won’t be able to get a mortgage to finance it. For these purposes, though, there’s a commercial mortgage. It isn’t all that different from a traditional mortgage. Interest rates are usually similar to those of standard mortgages, and the minimum down payment and loan term are typically comparable as well. The conditions under which you qualify for the mortgage are usually the same, too.

If you find yourself in a situation where you’ve discovered your dream property but it’s zoned as a non-residential space, a standard mortgage is the best solution. You can use it to purchase the non-residential space and finance its renovation. However, the bank may be reluctant to approve the loan. Commercial spaces do not have the same value as residential spaces, so the bank may require an additional property as collateral. You must also obtain approval for the rezoning from the local building authority before beginning the conversion.

How does early mortgage repayment work when selling a property?

If you’re planning to sell a property with a mortgage, you might want to consider paying it off early. Doing so will make the property easier to sell and will also speed up and simplify the entire process. Alternatively, you may have received a large sum of money and want to use it to pay off the mortgage to avoid fees. So how does early mortgage repayment work when selling a property?

You can prepay your mortgage in full or in part at any time. However, this does not automatically mean that prepayment will always be completely free of charge. Under the Consumer Credit Act, a bank may, in certain situations, require reimbursement of costs; however, the amount is capped by law.

For standard residential mortgages, the reimbursement may not exceed 0.25% of the amount repaid early for each full year remaining until the end of the fixed-rate period. Overall, it may not exceed 1% of the amount repaid early and is also limited to the actual costs calculated in accordance with statutory rules.

The new rules take effect on September 1, 2024. For older fixed-rate mortgages, they will apply from the moment a new fixed-rate period begins after that date. Therefore, when making an early repayment, it is not only the date you originally signed the mortgage that matters, but also the date your current fixed-rate period began.

When can a mortgage be paid off early without compensation to the bank?

The Consumer Credit Act also specifies situations in which the bank may not demand compensation for costs. Typically, these include, for example:

• repayment of up to 25% of the total loan amount within one month prior to the anniversary of the contract’s execution,
• repayment during a period when no fixed interest rate has been agreed upon,
• repayment within three months after the bank notifies you of a new interest rate,
• certain serious life events, such as death, long-term illness, or disability, if they significantly reduce your ability to repay the loan,
• under statutory conditions, the sale of the financed or mortgaged property or the settlement of joint marital property, provided at least two years have elapsed since the loan agreement was entered into.

Mortgage Refinancing: How Does It Work?

Mortgage refinancing means that you pay off your existing mortgage with a new loan, usually from a different bank. Refinancing most often takes place before the end of the fixed-rate period, when you can compare your current bank’s terms with offers from competitors. The new bank will generally pay off the balance of the original loan, and you will then continue making payments to it.

When refinancing, it’s not enough to just look at the interest rate. Be sure to also compare the APR, fees, required insurance, terms for making extra payments, and the length of the new fixed-rate period.

Summary

A non-bank mortgage may have more lenient terms than a bank loan, but it is generally more expensive and requires a thorough review of the contract. Under certain conditions, a property purchased at auction can be financed with a mortgage, a pre-mortgage loan, or a mortgage arranged in advance; however, it is essential to secure financing in a timely manner. For commercial properties, financing depends, among other things, on the property’s intended use and the specific bank’s terms. Early repayment of a mortgage is possible at any time; as of September 1, 2024, any reimbursement of the bank’s costs will be governed by new rules under the Consumer Credit Act, and in many situations, the mortgage can be repaid without such reimbursement. The end of the fixed-rate period is also a good opportunity to compare offers from different banks and consider refinancing your mortgage.

Be sure to read the first and third installments of this series as well.

In the first installment, you’ll learn how to sell a property with an outstanding mortgage, how a renovation mortgage works, and whether and why you need property insurance to get a mortgage.

The third part focuses on the option of buying a house on an installment plan without a mortgage. You’ll also learn what requirements you must meet to get a mortgage for a plot of land. We’ll also answer questions about mortgages for cooperative apartments and the option of a mortgage without real estate collateral or with another property as collateral.