Nine Times Your Net Annual Income — Banks Won’t Lend You More
Due to the rising prices of real estate, the Czech National Bank (ČNB) aims to reduce the risk of household over-indebtedness. As a result, new mortgage eligibility rules have been in effect for several months, marking the end of the mortgage boom.
Since October 1, 2018, a mortgage loan cannot exceed nine times the applicant’s net annual income. With the average net monthly salary in Prague at around CZK 27,000, the maximum mortgage amount a person can obtain is roughly CZK 3,000,000.
Monthly Payments Cannot Exceed 45% of Income
The second rule limits the borrower’s monthly debt service ratio. The total of all monthly loan repayments may not exceed 45% of the borrower’s net monthly income. This means that, for an average Prague salary, the regular monthly repayment should not be higher than CZK 12,000.
In addition, the 2017 recommendation remains in force: commercial banks no longer provide 100% mortgages and require at least 10% of the property’s value to be financed from the borrower’s own funds.
In practice, it has been shown that the DSTI (Debt Service to Income) indicator — the ratio of the monthly payment to net income — is a greater obstacle to obtaining a loan than the DTI (Debt to Income) indicator — the ratio of total debt to net income. Statistics from the past two months show that around 20% of applicants have been unable to obtain the loan amount they wanted due to these new rules.
Example: Apartment in Prague-Strašnice
For an apartment in Prague-Strašnice, where prices average around CZK 80,000/m², a 50 m² apartment requires CZK 400,000 in own funds (10% of the property’s value) and a net monthly income of at least CZK 36,500. The monthly mortgage payment would be around CZK 16,500, which is right at the upper limit of 45% of net income.
This calculation assumes an interest rate of 3.59%, a 30-year term, and 10% own funds.
Obtaining a mortgage and purchasing one’s own home is therefore becoming increasingly difficult. As a result, many people are turning to rental housing, but rents are rising even faster than property purchase prices.