Can I buy a “družstevní” flat with a mortgage?
Updated: Mar 20, 2020
"Can I finance a 'družstevní' flat?" is one of the most frequently asked questions amongst our clients. This topic might often look a bit too confusing for non-Czechs; that's why we've put together this article to help you. We'll explain all the major points and demystify the topic of financing a 'družstevní' flat.
Today you will learn:
What is a “družstevní” co-operative union flat?
Can I finance the flat via a mortgage?
What are pros and cons of owning a “družstevní” flat?
How the transfer into personal ownership works, complete with examples.
Note: the terms “družstevní,” union, and co-op all mean similar things in this article. Sometimes we refer to the flat, sometimes to the people in charge, and sometimes to the entity itself.
A brief intro into the history:
To make a long story short, during the communism era all flats were owned by the state. After the revolution, flats were either returned to their original owners or newly “freed” buildings formed co-operative unions (“družstvo”) which managed and operated the flats. Unions can be very small, with just a few units, or corporate-like, with thousands of flats. Co-operative unions then started to allow transfers of the “right to use the flat” into personal ownership (so from this point they started to be the “real owners”), and so homeowners' associations (HOA) were formed (“Společenství vlastníků jednotek" – "SVJ").
All right, so do I own a flat or a share of the union?
A bit of both — you own a share in the union, which entitles you to use and rent for your personal use a certain flat in the co-operative union. The main difference from regular flat ownership is that technically the owner of the flat is the union; you lease the flat from them for a fixed rent. This is quite troublesome since it limits your lending options for their purchase, as you will see below. What you can do (if the union allows it) is that you can transfer the share into personal ownership and become the “real” owner of the unit in the Land registry. In order to do this, you would need to comply with the Union's process and possibly pay off the admin fee and annuity left on the flat.
Hold on — what is the annuity?
The basic idea is that when the union was formed, each flat started with, let's say, 1MCZK debt on it (interest fee), which is slowly paid off from the rent. The annuity is the amount left to pay, so it can be a few hundred thousand or zero if it is all paid off. Even if the annuity is zero, you still need the union's approval to transfer to personal ownership.
Can I finance the flat using a mortgage?
Yes, but the conditions are quite tight so very few people do it.
There are two scenarios:
The easy way: You own another property without a mortgage on it, which you would put as a security for the bank, or you own a flat with a mortgage, but still you have some free equity on it (for example, the flat is worth 7M CZK and the mortgage is only 2M CZK). This way, it is quite easy to purchase the co-op flat; however, few people are able to do that.
The hard way: The co-op flat share itself has to be transferred into personal ownership within one to two years and the maximum loan amount is 3–5M CZK. Until you are the personal owner, the bank cannot put security on the property so the loan is unsecured for the bank, hence these limitations.
It also means you need to check that the flat can be transferred to personal ownership and, preferably, that the union itself already has experience with it. You need to know how long it would actually take, what are the fees, if there is any annuity left to pay or debts for the unit, who is in charge of the union, etc. And count on delays...
What are the pros and cons of such a purchase?
flats are cheaper
stronger community amongst owners than in normal HOA
major repairs to the flat are paid by the union
you do not pay the 4 percent transfer tax when you purchase the share or transfer it into personal ownership
obstacles in financing
older neighbors and people in charge (who usually don't speak English)
can rent out to someone else only with the approval of the union; Airbnb is very hard
you are technically a lessee rather than a flat owner
Now let's consider an example of one purchase:
You have found a nice flat in Holešovice in Prague 7 owned by a co-op where the annuity is paid off. The advert says it can be transferred immediately into personal ownership. The purchase price is 5M CZK, and you have 1M CZK saved. The bank confirms the flat’s value of 5M CZK and that when it's transferred to personal, they can lend you on “unsecured loan” the 4M CZK temporarily. Along with this unsecured loan contract, you would also sign a regular mortgage contract, the purpose of which is to refinance the unsecured part into a regular mortgage, also in the amount of 4M CZK. Until you transfer to personal the interest is higher (let's say 4.5 percent) and you are paying off only the interest, not the capital of the loan. In our case, it means 15,000 CZK monthly just for interest. It is in your best interest to transfer to personal ownership ASAP so you can transfer into a regular mortgage (example interest: 2.4 percent over 30 years), which would carry repayments of 15,600 CZK, which already includes the capital repayments part.
We hope this answers most of your questions about the co-op ownership. Should anything be unclear or if you want a free consultation with a mortgage broker about your specific inquiry, don't hesitate to contact Robin at +420 777877849 or email at email@example.com to meet over a coffee.