In recent weeks, there has been a lot of talk about the amendment to the Consumer Credit Act, which modifies the rules for early repayment of mortgages (including in the case of refinancing). The changes brought by this amendment are several. Today we will look at them and tell you what the real impact will be.

What exactly is changing?

1. Refinancing the loan during the fixation period or repaying it outside the fixation anniversary

Today's market situation makes it possible to refinance an existing loan during the fixation period almost without penalty. Most banks will let you refinance your loan for an administrative fee of around CZK 1,000. This is where the most talked about change comes in. Banks will now be able to apply a prepayment penalty of 0.25% of the loan balance for each year remaining in the fixing period, up to a maximum of 1% of the amount repaid early. A number of other EU Member States also apply this model.

Although this may at first sight appear to be a purely negative change, it is likely to bring a major benefit. Today, banks' trading margins on loans are larger than they used to be in the past and their incentive to reduce rates is low. One of the main reasons for this is precisely the client's ability to refinance the loan without penalty. After the amendment to the law is enacted, we expect banks to react by lowering rates, because they will be more confident that clients will not want to refinance their loans at any even slightest rate correction.

2. More options to repay the loan without penalty

A mortgage is a commitment for a large part of your life, but it can change from one day to the next. A major positive of this amendment is the modification of the possibility to repay a mortgage loan early without penalty. Now banks will not be able to charge you a penalty for early repayment when you sell the property after a minimum of 2 years from the signing of the loan agreement, or when you divide the matrimonial property in the event of a divorce. The option to prepay the mortgage in difficult life situations such as death, long-term illness or disability of the client or his/her spouse remains valid.

3. More accurate screening of loan applicants

Another change that has not been talked about much is that the amendment provides for the possibility for banks or non-bank providers to use automated models to verify information on consumer spending. Modern trends are not avoiding the banking sector, and the number of tools that can assess the 'reliability' of a client is growing every day. This change may contribute to faster assessment of clients and therefore to faster granting of credit.

For whom will the changes apply and from when?

The effectiveness of these changes from the amendment to the Consumer Credit Act will be effective from 01.09.2024. This means that loans approved and signed before this date will be governed by the existing terms and conditions and the new terms and conditions will only apply after the end of the current fixing period. So you don't have to worry that if you have a 2022 or 2023 mortgage you won't be able to do anything before the end of the fixing period even with a major reduction in market rates.

If you are our client, we will keep you informed of current developments in more detail and if there is a significant drop in interest rates, we will help you negotiate better terms either from your existing bank or a competitor.