New Rules on Early Repayments of Mortgages From January

Did you know that you can break your mortgage fixation, sell your property, and refinance anytime, even if you fixed with the bank for three, five, or eight years or so? The bank must allow you to close the mortgage prematurely… for a cost.

And there is a big change from January. Let us start from the beginning.

What is fixation:

When you take your mortgage for let’s say 20 or 30 years, the interest rate will not stay the same for the whole time. When taking out the mortgage, you choose a “fixation period”, which means that for the next X amount of years, the rate will be fixed at for example 5.39%, which is the best rate we can get today (end of November 2023).

With this in mind, you might be tempted to go for a shorter fixation and hope the rates go down. But, if you can refinance anytime anyway, why not choose 10 years and simply break the fixation whenever it suits you?

How much did it to break fixation?

Depending on when you signed your mortgage or renewed your fixation period (which, for the sake of working out these costs, is considered a reset of your mortgage and is affected by the current rules, not the ones you signed under) these were the early repayment penalties:

• Before December 2016: The banks used to charge up to 5% of the remaining balance for each year left until the end of fixation. Back then, fixation was reaaaaally binding.
• 2016 – 2020: There was an update of the law that restricted lenders to only charge the real costs incurred with the early repayments. It was, however, not clear what the real costs were. Some banks tried to charge missed interest until the end of the fixation period which was often hundreds of thousands of crowns.
• 2020 – 2023: The Czech National Bank clarified these rules and has been enforcing them by penalizing the banks that charged clients the missed interest. As of today, to my best understanding, no bank charges an early refinancing fee higher than 1 – 2,000 CZK anymore. So yes, you can break the fixation anytime, for almost no cost.

What does the new law change?

Since clients could break their fixations and leave their banks anytime, yet the bank was still tied by the fixation, this was not completely fair for the banks and the Ministry of Finance came with proposal to specify the “real costs” as missed interest, but no more than 2% of the remaining repaid mortgage balance.

The approved law is, however, even better:

• A maximum of 1% of the repaid amount can be charged as a penalty, but no more than 0.25% for each year left until the end of fixation.
• From January to September, any mortgages signed in 2024 will be subject to the old rules but from September onwards, they will be subject to the new rules
• If you sell the property after two years of ownership, this fee would not apply
• You can still repay 25% of the original balance every year for free (one month prior to the anniversary of the loan)

Summary:

Since you can still repay anytime and the penalty will not be higher than 1%, I don’t think anyone should be afraid of longer fixations. Taking a three-year fixation these days means you might be assuming the rates will be lower in exactly three years so you avoid this penalty. But equally, you can take a 10-year fixation, wait for whenever the rate is the lowest (maybe year two, four, or never?), and then pay the penalty.

Basically, when choosing the fixation, in my opinion, there is no right and wrong answer.

If you are curious, when I took my mortgage earlier this year, I selected 5 years.