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Mortgages take off as finance tool

The number of mortgage loans issued in Slovakia has increased by 240% over one year, reflecting the ability of healthier Slovak banks to compete for clients with better quality products.
While in 2000, mortgage banking was still stuck in its tracks, with few people taking mortgages to finance the purchase or construction of flats or houses, in 2001 the number of major banks offering mortgages has increased competition and in turn lowered interest rates on loans.
In 2000, banks issued mortgages worth Sk1.4 billion ($29 million); the figure for the first nine months of this year already stands at Sk3.7 billion ($78 million).


Mortgages are now available for as little as 4.9% per annum interest.
photo: TASR

The number of mortgage loans issued in Slovakia has increased by 240% over one year, reflecting the ability of healthier Slovak banks to compete for clients with better quality products.

While in 2000, mortgage banking was still stuck in its tracks, with few people taking mortgages to finance the purchase or construction of flats or houses, in 2001 the number of major banks offering mortgages has increased competition and in turn lowered interest rates on loans.

In 2000, banks issued mortgages worth Sk1.4 billion ($29 million); the figure for the first nine months of this year already stands at Sk3.7 billion ($78 million).

Analysts say that the banks' race for more mortgage clients is paying off because Slovaks traditionally tend to save, and therefore are not as deeply indebted as the average western household.

"Slovak families have few debts, and thus have resources which they can use to take mortgages. Banks can take advantage of this," said Ján Tóth, an analyst with ING Barings bank in Bratislava, adding that the trend is likely to continue.

Tóth estimated that the value of mortgage loans issued in 2002 would hit Sk8.7 billion, and Sk13.6 billion in 2003.

Terms

Conditions in Slovakia for obtaining mortgages have historically been tight because of the poor protection offered by Slovak law to creditors, and the stout protection from eviction enjoyed by non-paying tenants.

The biggest mortgage that can be taken is now only 60% of the value of the property sought, although that figure will increase to 70% next year. The remaining resources have to be provided by the client.

A mortgage has to be secured with existing property, which means if a citizen takes out a loan for property which is not built yet, he or she has to use another property to back the loan.

But at the beginning of this year, conditions for getting a mortgage loan became more favourable. The largest Slovak saving bank, Slovenská sporiteľňa, cut its interest rates on mortgage loans from 11.75% to 10%.

The move was followed by all the other players on the mortgage market, including Všeobecná úverová banka (VÚB), Tatra banka, Istrobanka and HypoVereinsbank Slovakia.

Combined with a state subsidy on the loan interest of 5%, which was introduced in 2000, the cheapest mortgages available in Slovakia now go at an interest rate of 4.9% per annum.

"Mortgage banking was quite weak before the state subsidy was approved. But then we dropped rates, and that, together with the subsidy, caused an increase in the number of loans issued," said Ľuboš Ševčík, the head of the mortgage department at VÚB bank, which holds a majority share of the Slovak mortgage market.

New financing tool

Mortgages are the newest of the three methods for financing housing construction or purchase available in Slovakia.

The oldest, and still most frequently used financing method, is construction savings funds (stavebné sporenie), in which the client deposits a set monthly sum over a period of several years. If clients stick to their deposit plan, they become eligible for state loans at 4.7% interest to carry out their real estate plans.

The third option is a loan at between 3.6% and 4.4% interest from the state-financed housing construction fund, which is designed mostly for people in the middle income sector.

While mortgage loans have started slowly, they took an 13% share of construction financing in 2000; construction savings funds held a 52% share. ING's Tóth predicted that mortgages could have a 40% share of the financing market by the end of 2001, and 60% in 2002.

Although the government supports mortgage loans as the most efficient way to encourage greater housing construction in Slovakia, some officials have said that mortgages were really only available to wealthier citizens.

Pavol Giller, the head of the housing construction department at the Construction Ministry, explained that many people still did not have a large enough income to be judged capable of meeting monthly mortgage payments. He added that rules requiring 40% of the value of mortgages to be put up by clients themselves, and the requirement that real estate be used as collateral, meant in effect that young and low-income families stood little chance of getting a mortgage.

"Construction savings funds, on the other hand, target a broader group of people, and when citizens takes loans of less than Sk600,000, they don't need to use property as collateral," Giller said.

But Soňa Böhmerová, 23, said that the main advantage of mortgages remained the speed with which they could be obtained.

Böhmerová, who with her husband has decided to take a mortgage next year because they need to buy a house immediately, said: "With the saving fund we would have had to wait for several years, but with the mortgage we could be flexible. And the economic situation is improving, meaning that more and more people are finding they can cover a mortgage loan from their salaries."

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