Mortgage or home saving loan?

Do you want to buy a flat or build a house and are you deciding how to finance your new real estate? Besides mortgage loans, in recent years the Czech financial market has offered an interesting financing alternative in the form of long-term loans from home saving banks.

In an effort to compete with mortgage loans, almost every home saving bank today offers at least one loan product enabling repayment of a large loan running to millions of Czech koruna with similarly low monthly repayments for a period of up to 23 years. Besides the comparable maturity and acceptable monthly instalments, these types of loans also offer a number of interesting advantages when compared to mortgages.

Basic conditions for obtaining a loan

Long-term loans (Topkredit from Českomoravská stavební spořitelna - "Liška", formerly ŠAMPION from Stavební spořitelna ČS - "Buřinka" or Impuls from Všeobecná stavební spořitelna KB - "Modrá Pyramida") always constitute a special loan "programme" in home saving banks - product range and therefore usually carry a lower interest rate than ordinary bridging loans, a lower fee for provision of the loan, and have a guaranteed shorter loan application processing time or less strict terms for the client's required income.

The first condition for obtaining a loan is signing a home savings contract, out of which the loan is provided to the client. Home saving banks - long-term loans are always bridging loans (interim loans) - the total repayment period therefore consists of two consecutive phases. During the first phase, which lasts from two to approximately nine years, the client only pays interest on the total target amount, regardless of whether the client's own savings already form part of the target amount or not. Interest rates on the long-term loans currently on offer range from 3.7% to 6% p.a. Besides interest payments, the client saves in home saving (as well as regular monthly deposits, the client can also effect unscheduled deposits of any size or deposit the entire necessary amount of savings in one go) with state support and with interest on the deposited sums. Roughly at the moment when the amount of savings with state support and interest reach 40% of the target amount (or, more precisely, when the client attains the necessary ?score?, but no sooner than 24 months into the home saving contract), the bridging loan is replaced by a home saving loan that is more advantageous for the client.

In the second payment phase, lasting from 7 to 12 years, the client thus pays interest (4.75% to 5% p.a.) only on the gradually decreasing size of the home saving loan, whose initial value is the difference between the target amount and the home savings with state support and interest at the day on which the bridging loan ended.

The aforementioned, somewhat complicated construction represents the main disadvantage of loans provided by home saving banks, especially in the first payment phase when the client pays interest on the entire target amount, although part of the target amount (at least 40% when the bridging loan ends) always comprises his own savings.

It should be added, though, that an indisputably advantageous loan first appeared on the Czech market in 2004 - this loan did not actually include a bridging loan phase. However, even the bridging loan should not constitute a financial catastrophe - using more than one home saving contract with state support and tax advantages may can reduce the average real interest rate to a very acceptable level (around 5.2% p.a.), and this, along with other benefits, can make the loan an interesting alternative to a mortgage.

Long-term loans are used mainly for lending higher amounts, from hundreds of thousands to millions of Czech koruna, for the purchase or construction of housing and are thus not designed for small-scale renovation projects or building alterations, for example. The main purposes that home saving banks offer long-term loans for are thus buying a flat or house, building a house or flat or extensive renovation projects. The minimum loan tends to be CZK 300,000. Home saving banks require the same security on long-term loans as banks do for mortgage loans - i.e. lien on the real estate. The maximum loan (of actually lent money, not the target amount) is at most 80% of the estimate price of the real estate, usually defined by an authorised expert of the home saving bank.

Unlike ordinary bridging loans, however, long-term loans secured by pledged real estate do not usually require an initial deposit for the home saving contract - the initial deposit with ordinary bridging loans is usually at least 10% of the target amount.