The interest rates may unpleasantly increase after the fixation period. Think of it already in the negotiation of mortgages, and consider everything well.
The interest rates are still decreasing and mortgage loans are cheaper than during the previous years in the Czech Republic and in the Central Europe as well. It is particular important to remember that the current agreed interest rate is valid only for a fixed period and not for the entire duration of your mortgage. The fixation period is usually set at 3, 5 or 7 years. After this period, you will have a different interest rate and due to the fact that interest rates are very low nowadays, you can assume that your interest rate may be significantly higher and thus your monthly payment.
Let's show an illustrative example. Suppose you are planning to buy an apartment in June 2015 and take a mortgage in the amount of CZK 2 million. Your interest rate will be 1.89% per annum and your monthly payment would be CZK 7,283 in case of 30 years duration of your mortgage. You choose a 5 year fixation period so this conditions will be valid until June 2020. And what's next?
The monthly payment may raise by thousands of crowns after the fixation period.
The bank will offer you the new conditions to continue and you can decide if you stay at the same bank or you leave and refinance the mortgage to another bank in June 2020. However, the interest rates generally depend on the current economic situation and it may happen that in 5 years you will have the interest rate almost by 3 percentage points higher!
For example, you can negotiate new interest rate of 4.89% per annum in June 2020 and your monthly payment would increase to CZK 10,062. In comparison to your former monthly payment would be your new payment higher after the fixation by CZK 2,779!
The question is: Are you prepared to pay substantially higher payment if the interest rate will increase? Or your budget is set on the maximum and you can get into the trouble with paying the mortgage in case of increasing interest rates?
We advise our clients on the possibility that their monthly payment can be up to several thousand crowns higher than it is today in a time of low interest rates.
How can you prepare?
The preferred option is to create the financial reserves to be able to cover increased monthly payments. If it is not possible, it is advisable to reconsider mortgage financing or choose a cheaper property in this case.
The mortgages are definitely easily available, but think ahead. It is mostly a commitment for 20 or 30 years, not only for the first fixation period (eg 5 years).