Financing the purchase of cooperative flats

With their much lower prices than privately owned flats, cooperative flats are an attractive option for people looking to acquire new housing. The restrictions on using a mortgage make acquiring a new cooperative flat more difficult, though. So what options are available for people wanting to buy a cooperative flat on a mortgage?

Pre-mortgage loan

Pre-mortgage loans are a unique instrument for acquiring a cooperative flat, but they can only be used if the cooperative flat buyer is sure that the flat will be become his private property within 12 months.

The principal benefit of a pre-mortgage loan that makes it particularly suited to buying cooperative flats is that this loan is secured by a guarantor and not by pledged real estate. Usually 1 or 2 guarantors are enough to secure the loan (married couples are treated as one guarantor).

The client is usually provided with a pre-mortgage loan for a period of at most 12 months. Throughout the duration of the pre-mortgage loan the client only pays interest on the pre-mortgage loan, so the outstanding loan amount is not reduced by the payments. After this period elapses, the client does not have to pay off the loan in one go out of his own funds ? the loan is automatically paid off by the mortgage loan that the bank provides the client on the basis of one loan contract immediately after the pre-mortgage loan has been provided.

The mortgage that is provided to the client along with the pre-mortgage loan must be secured by pledged real estate, however. For that reason, pre-mortgage loans can successfully be used to buy cooperative flats only if the buyer is certain that the flat will become his private property during the next 12 months. When the client becomes the flat?s owner, he pledges the flat to the bank so that the pre-mortgage loan can be ?transformed? into a mortgage loan.

What is important is that the client must be registered as the flat?s owner in the real estate register within 12 months, which is the maximum ?lifespan? of the pre-mortgage loan. Accordingly, to terminate the pre-mortgage loan it is not enough for the client to sign a contract with the cooperative for transfer of the flat into his ownership, for example.

Summary of basic conditions:

The maximum duration of pre-mortgage loans is 12 months. The loan must therefore be ?terminated? within 12 months after the signing of the loan contract ? i.e. the flat must become the client?s property within 12 months.
The size of the loan does not decrease during the pre-mortgage loan and the client only pays interest.
Interest on pre-mortgage loans ranges from approx. 4.5% to 8% p.a.
The pre-mortgage loan is automatically terminated when it is ?transformed? into a standard mortgage loan with the bought flat owned by the client acting as security.

Example:

Mr Smith wants to buy a cooperative flat that comes with the right to take personal ownership of the flat during the next quarter. The flat costs CZK 1,900,000. Mr Smith can provide two guarantors to secure the loan: his parents and his girlfriend?s parents. As Mr Smith and the potential guarantors have sufficient incomes, the bank offered him a thirty-year mortgage with 3-year interest rate fixation at 4.58% p.a. with a pre-mortgage loan with an interest rate of 6.0% p.a. covering the entire purchase price of the cooperative flat.

When Mr Smith bought the flat he started to pay the bank interest on the sum of CZK 1,900,000 at 6% p.a., i.e. CZK 9,500 per month. These were merely interest payments and did not decrease the loan.

Subsequently, Mr Smith asked the cooperative to transfer the flat into his ?private ownership?. Once the flat has become his property, i.e. Mr Smith became its registered owner in the real estate register, and he pledged it to the bank, he stopped paying interest on the pre-mortgage loan and started paying instalments on the mortgage with an interest rate of 4.58%, i.e. CZK 9,718. The bank released both guarantors from their guarantee commitment when the lien was entered in the real estate register in the bank?s favour.