Do you want to avoid rising interest rates on mortgages?
Does your mortgage?s fixation term end in 2008? Then now is the right time to start thinking about how your mortgage payments will increase considerably next year. Now is the best time to avoid this.
Why interest rates will rise
There are several reasons why rates should rise:
- Inflation is rising in the Czech Republic, and the Czech National Bank will try to curb it by raising interest rates.
- The prices of crude oil and other raw materials are rising. That reinforces Czech inflation growth.
- The tax breaks on mortgage certificate will be scrapped. Banks use these to obtain money to lend via mortgages. That will push up rates by 0.4 percentage points.
The only things that could protect us from rising rates are substantial strengthening of the Czech koruna and possibly a global recession caused by the mortgage crisis in the USA.
Yet it?s clear that not even the marked strengthening of the koruna will save Czech debtors from increasing interest rates. The raising of VAT on foods, medicines and new flats makes inflation growth almost a certainty and the strengthening koruna will probably not even cancel out the 0.4 percentage point increase in rates resulting from the scrapping of tax relief on mortgage certificates.
How to counteract rising interest rates
Home saving is a good way to counteract rising interest rates. There are many reasons for this:
- Home saving banks do not earn money from mortgage certificates. The scrapping of tax relief on mortgage certificates will thus not directly affect them, even though they will probably also be happy to ride the wave of rising rates.
- Home saving banks earn money from loans, mainly from their savers. As people usually save for at least 5 to 6 years with home saving banks and rarely withdraw their savings prematurely, home saving banks know the value of their resources for many years to come. That makes interest rates on loans more stable with home saving banks, and as they lend their savers? money and hardly ever borrow from the Czech National Bank or other banks, interest rate movements do not affect them so strongly.
- The law dictates that home saving banks? interest margins must not exceed 3 percentage points for loans from home savings (that does not apply to bridging loans, however).
Why now
Even if your fixation term is going to end next year, it?s a good idea to arrange refinancing this year. It will save you lots of money and worries:
- If rates continue to rise, home saving banks will also have raised them by next year. Refinancing may not be so beneficial then, so it?s a good idea to make use of the current conditions.
- Loan processing is slower in home saving banks and if you don?t refinance in time, you are at risk of penalties from your current bank to the tune of tens of percent of your loan.
Calculate carefully
The advantages of refinancing need to be calculated carefully. That?s because home saving banks do not provide refinancing loan advantages like some banks do. That means you?ll have to pay a fee for the home saving contract, increasing the target amount and provision of the loan. You may also need a new estimate of the value of your real estate. So you need to calculate whether refinancing pays off. What is more, using home saving to refinance will probably only make sense if you stick with it until your loan is fully repaid. Terminating loan repayment earlier (e.g. by refinancing back to a mortgage), especially while the bridging loan is in effect, would be disadvantageous.
Final recommendation
It should therefore be advantageous to refinance a mortgage whose fixation ends in 2008. One risk in this move could be if the mortgage crisis in the United States caused global recession. We cannot responsibly make any prediction as to the probability of that eventuality.
