8 September 2020
Lending Focus - September 2020 – 2 of 7 Insights
The COVID-19 pandemic has hit the world's financial markets and its impact is becoming evident, not only in the finance sector but also in the area of debtor-creditor relationships. The Czech Republic is no exception. In line with the global response, we can see initiatives being introduced across the market, coming from the Czech National Bank (CNB) as the supervisory body of the financial markets as well as from the government and Parliament.
In recent years, the CNB has been tightening limits relating to mortgage lending conditions in order to support the financial stability of the Czech economy and minimise the risks of market expansion (for more information, please see our previous article).
In response to the pandemic, on 1 April 2020, the CNB relaxed its recommendations regarding the assessment of new mortgages. The Loan-To-Value ratio has been increased from 80% to 90%. In other words, a mortgage applicant can now request a loan for 90% of the property's value and therefore a lower amount of own capital is required.
In connection with the Debt-To-Income ratio, the CNB has cancelled its recommendation to the banks to assess their clients with reference to this ratio. The banks should, however, still monitor this ratio.
As of 8 July 2020, the recommendation for banks to observe a 50% level of Debt Service-To-Income ratio has been cancelled as well. However, the recommendation to monitor this ratio applies here as well.
As a result of these CNB measures, mortgage applicants with the same income level and the same value of real estate security will now be able to obtain larger loans in comparison with the period preceding the pandemic.
The Czech Parliament has adopted law that has enabled debtors – both business and consumer borrowers – to postpone their scheduled loan repayments for a maximum of six months.
The law applies to loans provided by banks and other regulated entities as well as loans provided by non-banking lenders. It applies generally to all loans extended prior to 26 March 2020, except to some loan categories such as operating leases, revolving facilities, loans for investment instruments trading or loans where the debtor was as at 26 March 2020 in arrears with the payment of its debt for more than 30 days.
As of 17 April 2020, debtors are entitled to request (the 'opt-in principle') that the maturity of monetary debts under a loan agreement (ie interest as well as principal) is prolonged by the length of the moratorium period, which can last until 31 October at the latest.
If loan instalments are postponed, the duration of the related security will also be extended. Furthermore, the interest rate during the postponement period will be capped at the repo rate plus eight percentage points (currently at 9%), if no lower interest rate was agreed. Different conditions apply to debtors, who are entrepreneurs or legal entities, where typically no lowering or capping of the interest rate applies. These debtors are obliged to continue to pay interest as originally agreed in the loan agreements.
Following adoption of the new law, the CNB's statistics show that the loan moratorium has been used by only 10% of clients (65% of which were consumer loans, 25% mortgages and 5% commercial loans).
In line with the CNB's statistics, the prices of real estate property have not been significantly affected by the pandemic (except for Prague, where recent data shows that there has been a slight decrease).
Nevertheless, the CNB sees a potential for decline in prices in the next quarters mainly with respect to commercial premises, as this sector has been negatively affected by COVID-19. As for the demand for mortgages, the record numbers reached in the first four months of 2020 will probably decrease in the coming periods.
If you'd like to discuss any of the issues in this article in greater detail, please reach out to a member of our Banking and Finance team.
by Nick Moser
by Multiple authors