Seven Crucial Things to Check on Your Mortgage
About 50% of property purchases are made with the help of a mortgage, despite relatively high-interest rates of around 5.5%.
However, just because a bank has agreed to give you the mortgage, doesn’t mean it’s all smooth sailing from there.
When you have financing from a bank, once the mortgage is approved, you should make sure you completely understand the mortgage contract so as to avoid any potential issues.
Because I have been helping foreigners with their mortgages for the last 10 years, I would like to share a few tips on what to watch out for, BEFORE the mortgage is signed.
Once the mortgage is approved, the bank will set a list of about 5-10 conditions you still need to meet after signing the mortgage and before it actually sends the money. These lists typically consist of:
- Deliver the bank-signed pledge contract (with verified signatures) for the property to the land registry
- Deliver the bank-signed purchase and escrow contracts
- Prove that you paid the down payments from your own finances, not from another loan
- Take out insurance for the property and show the confirmed payment
- If the seller has a mortgage on the property, get confirmation from the seller’s bank about approval for sale and the calculation of how much money needs to be paid to close their mortgage
- Other conditions depending on the client or property could include, for example, an occupation permit for the development.
Usually, the drawdown conditions can be met within one to three days after signing the mortgage and then you fill the drawdown order, typically online or, in some banks, on paper.
For those of you who are self-employed, you might also need to show confirmation of your debt status from the financial office which can take weeks to get so make sure you get it in advance if it is the case that your bank will want it.
My record with the most complicated client was 17 drawdown conditions. And yes, we managed and the client got the money he needed.
Timeline to pay the money
In the purchase contract, you will have a few days to pay your own funds and a bit longer to pay the funds from the mortgage. The bank is VERY strict about this deadline. For example, if you miss the deadline by just one day, the bank will most likely not send the money at all and they would usually ask for an amendment to the purchase contract to be signed, which would add extra time for the payment.
Always coordinate with your lawyer, the seller, and the bank on the deadline and drawdown conditions to make sure you can draw the mortgage in time.
Interest rate and RPSN
Before you apply for a mortgage, you most likely will have chosen a lender based on the rates they are offering. Very often the most suitable and cheapest bank can be different from your home one, so make sure you shop around or simply find an independent mortgage advisor who will do the research for you.
As a mortgage advisor, this is one of our biggest added values, since we are going to make the comparison for you so you do not have to run from one bank to another and explain your situation. I like to say speaking to a mortgage advisor is like speaking to all the banks at once.
The interest rate in the approved contract should be the same as you were promised but also watch for the RPSN rate, the Annual Percentage Rate of Costs. It is a theoretical rate that could be valid if the bank would take other costs into account for the mortgage and add them to the mortgage repayments. This could be fees for the land registry, interest payment for the first month, valuation, and more.
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It is completely normal to see RPSN +0.1-0.2% compared to the interest rate, but if the difference is 0.3% and higher, make sure you understand why as often it means the bank added life or mortgage insurance. This life insurance can cost a few thousand per month, increasing the overall cost and RPSN so make sure you really want it.
Share the pledge contract with the seller
Part of the mortgage documentation is also a pledge contract. This is collateral/lien on the property which serves as security for the bank should you default on the mortgage. Share this in advance with the seller since they would need to sign this as well and they should also check their personal details.
Check your personal details
Since you are most likely a foreigner, your name and maybe address abroad might be more complicated than a typical Czech one. Make sure there is no mistake or typo prior to signing.
My record here is a client from Luxembourg with nine names, which didn’t even fit into the bank’s software! We needed to add the names by hand to the contracts later…
Usually, the bank will also require that you open a bank account with them and also send some money there monthly. Sometimes, you need to maintain a certain cash flow. For example, in Komercni Banka you should send 150% of the repayment amount to the checking account per month and make three outgoing payments.
Watch out for this condition: “Notarial deed with permission for direct enforceability”. Banks sometimes require it for riskier cases as another security. This document basically allows the bank to skip the court and go directly to foreclosure of property (execution in Czech) should you default on the mortgage. Plus you need to pay for this document yourself, which costs tens of thousands.
And a final one
ALWAYS read the contracts you are signing. Yes, the contracts are in Czech, but if you have them in a digital version, just open in Word, go to revisions > translate the whole document, CZ > EN, and violá… 21st century.
Mortgages are our daily bread. Over the last 10 years, I have seen more than 300 mortgage contracts so in case you could use any help finding the best mortgage for you, do not hesitate to ask.
Disclaimer – mortgage advisory is always free of charge for the client since we’re ultimately paid by the banks.
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