Pre-approved Mortgages

In today’s, although currently slower, but still dynamic real estate market, where competition is fierce and properties attract multiple buyers, those with financial flexibility often find themselves in a favorable position. Recognizing the challenges posed by such a scenario, certain banks have responded with innovative mortgage products tailored to address the needs of buyers in a rapidly evolving market. 
It is important to know that not all of the banks enables to have a pre-approved mortgage and it is still quite uncommon – majority of mortgages are standard.

The essence of these mortgage products lies in simplifying the approval process by relying heavily on document-based assessments. Essentially, potential homeowners provide the bank with comprehensive proof of their financial capacity, including income documentation from employment, tax returns, and detailed bank statements. With these documents in hand, the bank can expedite the approval process, and if the figures align, the loan is swiftly approved, allowing the prospective homeowner to sign the agreement. Subsequently, the property is delivered at the specified time, and the new homeowners can take occupancy.

While the prospect of a streamlined mortgage approval process may seem enticing, it’s important to approach these products with caution. Rushing into such a mortgage may not always be the optimal choice, and careful consideration is warranted. In fact, there are numerous cases where these specialized mortgages may not be the best fit for prospective homeowners.

Purpose and Suitability:

The primary purpose of these specialized mortgages is to provide a sense of security through the approval of a mortgage, especially in situations where quick decision-making is crucial. This becomes particularly beneficial when actively searching for a property and aiming to outpace competitors by having readily available funds to promptly respond to offers and sign reservation contracts.

The ideal candidate for a mortgage without a property is someone who is well-informed about their preferences, has a clear understanding of the required mortgage amount, possesses available funds, or has another property to secure. However, the decision to opt for such a mortgage should not be taken lightly.

Instances When Useful:

1. Imminent Risk of Mortgage Approval Challenges:
   • Situations where there is a risk of not securing a traditional mortgage in the near future, such as anticipating a drop in income due to family planning.
2. Transitioning Jobs:
   • Individuals who are employed and considering transitioning to self-employment, making a conventional mortgage unrealistic for at least a year.
3. Navigating Interest Rate Changes:
   • Times when interest rates are rising rapidly, prompting individuals to secure a mortgage under more favorable current terms.
4. Reservation fees:
   • Paying reservation fee is usually done prior to have a mortgage approved. That puts you into risk that when your mortgage is not approved you will generally lose your reservation fee, which can be a considerable amount (100k – 600k CZK). 
     Having the mortgage pre-approved lowers this risk substantialy. This is in my opinion the biggest advantage of pre-approved mortgages.

Instances When It Doesn’t Fit:

1. Uncertain Plans:
   • Cases where future plans are uncertain, such as considering building a house on purchased land rather than buying an existing property.
2. Stable Financial Situation:
   • Individuals with a stable income and no anticipated changes in the foreseeable future.

Risks and Considerations:

The main risk associated with mortgages without a property lies in the potential for not finalizing the mortgage, resulting in penalties. Additionally, there’s a risk of miscalculating the loan amount, with penalties imposed for deviations from the initially agreed-upon figures.

Another aspect often overlooked is the continuity of support from the financial advisor or banker. Given that their fees are typically received upon signing the mortgage agreement, there may be a question of commitment when it comes to assisting throughout the entire home-buying process. Evaluating contractual documentation, setting drawdown conditions correctly, and ensuring ongoing support are essential considerations. 

Generally speaking, the interest rates for pre-approved mortgages can be higher than a standard one, although the difference probably won’t be drastic and is worth the extra security than to lose your reservation fee or pay some fee for not fullfilling your purchase agreement.

Conclusion:

The intention of this article is not to unduly promote or discourage the utilization of mortgages without a property but rather to provide a nuanced understanding of their suitability in various circumstances. It is essential for prospective homeowners to carefully weigh the advantages and risks associated with such mortgages and determine whether this approach aligns with their specific needs.

After reading this comprehensive exploration, individuals are better equipped to assess whether a mortgage without a property is a suitable fit for their unique circumstances. For those still uncertain, engaging in a thoughtful discussion over coffee with financial professionals is recommended to gain further insights and make informed decisions regarding their home-buying journey.

If you want to meet for an initial meeting, you can email me at info@czechadvisors.cz or call me on +420 723 599 563