American Mortgage

So called American Mortgage is a special type of mortgage that allows you to borrow money for any purpose – like normal consumer loan – but you can take much higher amount opposing to security for a bank which is some property.
The most common reasons why bank customers apply for a no-purpose mortgage are to start a new business, to finance studies or children’s studies, or the American mortgage can be used as an immediate financial help in a difficult life situation and in case of health complications.

Today we’ll look at the benefits and potential problems you might encounter when dealing with American mortgage:

1) Basic characteristics of an American mortgage

American Mortgage enables you to leverage an equity you have (mostly real estate) into getting cash. This is useful for many purposes as you do not have to proof for what exactly you use the money for. 

2) Repayment period

As explained earlier the maturity of an American mortgage generally ranges from 5 to 20 years (today some banks offer up to 25 years). The applicant must meet the condition where the repayment period of the loan must not exceed, as a rule, 70 years of age which is considered as an end of productive age in most of the banks.

3) Loan amount

Some banks have a limit of maximum American mortgage amount. The limit can be anywhere from 10M to 25M.

4) Benefits of an American mortgage

The main advantage is clear – in comparasion with normal mortgage – that has to be used for buying some property – you don’t have to tell the bank for what purpose you are setting up an American mortgage.
This is useful for example for those interested in alternative types of property for which a conventional bank might not approve a conventional mortgage, or for other types of investments. Furthermore, for example, for the purchase of a car, repayment of other consumer loans (credit cards, overdrafts or classic consumer loans).

It is possible to get a significantly lower interest rate than a consumer loan – in fact, compared to a consumer loan, an American mortgage has a lower interest rate.
Since you give the bank your property as the security, the risk to the bank is lower and so it can afford to provide better terms than an unsecured loan.

The maximum amount you can take is usually 70% of the value of the property (i.e. 70% LTV).  So from a property that is evaluated to 10M CZK you can borrow 7M CZK.

Unlike consumer loans, you can spread the repayments on an American mortgage over a much longer period – up to 25 years – so the monthly repayments won’t be as high.
When you compare it to standard consumer loan you can only get a maturity of about 10 years – that significantly increases the monthly repayments.

5) Disadvantages of an American mortgage

Generally the main disavantage is the fact that American mortgages have higher interest rate than regular mortgages. The difference can be quite significant.

When you apply for a regular mortgage the bank will lend you usually around 80-90% of the properties value (LTV80 or LTV90), although many American mortgages will only lend you, for example, 50-70% of the purchase price.

The cash you borrow is secured by your property so if you do not pay the repayments in time in the extreme scenario you could lose the property.

You can’t draw state aid on the mortgage or deduct the interest from your taxes like you can with regular mortgages – even if the American mortgage is used for a purpose, i.e. for a home.

6) What do I need to arrange a US mortgage?

The requirements can vary greatly bank to bank but generally you will need to provide proof:

ID and passport

Proof of income (or tax return)

Bank statements for at least 3 months

Ownership certificate called List vlastnictví

Conclusion

It  should be noted that the US mortgage is not intended to replace a conventional mortgage, so if your goal is to buy a property for living or investment then I would suggest to use a regular mortgage.

That’s all from me today! Thanks for reading.
If you like reading about financial world I suggest you can also listen to our podcast called Good Mortgage Czechia! that is available on both Spotify and Apple Podcasts.

If you are currently working on financing a property or will be in the near future, write or call me so we can meet and talk about what it would require for you.

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