Fixation, the rate at which the bank guarantees your mortgage interest rate for a certain period of time, usually three, five, eight, or ten years, is a very confusing topic these days (end of 2023) and one of the most commonly asked questions by our clients.
But did you know you can break the fixation period anyway? If, for example, you select a five-year fixation and two years later, the market is offering better rates, you can ask your bank for refinancing at the new rate and for now, it’s free. Or you can approach your bank, tell them you’re thinking of leaving for a cheaper offer at another bank and you might be surprised by them dropping your rate anyway.
Why is fixation so confusing these days?
The trouble now starts with the recent update of the law which puts an end to free refinancing by allowing the banks to charge a 2% (of the remaining loan balance) early refinancing penalty.
The law update is still being discussed by parliament, mainly who it will affect:
- The penalty will apply only for new loans signed after 1.1.2024.
- The penalty will work for all loans signed even before.
If the first option is accepted and you take a mortgage this year, we would say longer fixations might benefit as you can still exit and refinance when the market improves for interest rates. Should the second one be approved, perhaps shorter fixations, such as three to five years, might be better.
Refinancing and penalty fee example
Even with the penalty, it would often be advisable to do the refinancing. Imagine you have a rate of 5.5% fixed for five years and rates go down to 3.5% in two years. Yes, you might pay a 2% penalty but it evens out on the third year and by years four and five, you’ll start saving 2% per year.
| 1st year | 2nd year | 3rd year | 4th year | 5th year |
|---|---|---|---|---|
| 5.5% | 5.5% | 3.5% + 2% fee | 3.5% | 3.5% |
This is a complex topic, and there is no right and wrong answer since we do not know how the rates will actually develop in the future. It is a crystal bowl kind of question. I do not think we are going to see 2-3% anytime in the next few years, as those rates were extremely low, in our opinion.
The main driving factor for the interest rates would be the inter-banking rate set by the Czech National Bank (click here to see history) and we do not think the rates are going to move anytime soon. We believe that one of the main reasons for the rates being that high is the relatively high inflation in the Czech Republic. Until the inflation is under control, we do not think the rates will go much lower. However, as mentioned earlier, this is really a very complex topic and there are so many factors to consider.
Robin’s mortgage example
Expats Finance Founder Robin took a mortgage at the beginning of the year and chose a five-year fixation as he found it to be the right balance at the time, including the option to break the fixation for a cheaper rate should there be one.
