Mortgages in Czech crowns or euros: currency risk for expatriates

Take a hypothetical engineer, paid in euros by a company abroad and living in Prague, who is offered a Czech mortgage in koruna. Why take a loan in a currency I do not earn? The opposite question is just as fair: why take one in euros when the flat, the bills and the repayment account are all in koruna? The answer depends on where the engineer's life and income will be in ten years.

This article explains currency risk in a mortgage, why Czech lending is mostly in koruna, and how an expatriate can think about the mismatch. It gives no exchange rates, since they change, and no forecasts.

What a currency mismatch is

A mortgage is a debt in a particular currency, repaid from income in a particular currency. When the two are the same, the exchange rate does not matter to the borrower. When they differ, it matters every month.

Take a borrower who earns in koruna and owes euros. If the koruna weakens against the euro, the borrower needs more koruna to pay the same euro instalment, and the outstanding debt, measured in koruna, grows. If the koruna strengthens, the debt shrinks. The interest rate may be fixed, but the exchange rate is not.

The same arithmetic runs the other way for someone who earns in euros and owes koruna. A strong koruna makes the debt heavier in euro terms.

Households in several European countries learned this in the wake of the financial crisis, when loans in Swiss francs became much heavier after the franc rose. The lesson is general: a low interest rate on a foreign-currency loan can be wiped out by a currency move.

Why Czech mortgages are in koruna

Czechia kept its own currency, as our explainer on the koruna and why Czechia kept it describes, and has not adopted the euro. The exchange rate floats, with the Czech National Bank (ČNB) intervening only in particular circumstances. The bank ran a commitment to weaken the koruna from November 2013 until April 2017, after which the rate returned to a float. How the framework works is covered in the koruna exchange rate regime.

For lenders, most borrowers earn in koruna and buy flats priced in koruna, so a koruna loan is the natural fit. A loan in a foreign currency is therefore a specialist product, available at some banks and for some borrowers, often those with documented income in that currency. Ask each bank what it offers, and be prepared for stricter conditions. Our article on what banks ask foreign borrowers notes that income in another currency is assessed more conservatively by many lenders.

The expatriate's position

Expatriates are exposed to currency risk in more ways than a local buyer, because their circumstances are less tied to one currency.

Income in a foreign currency. If you are paid in euros, dollars or pounds, a koruna loan is a mismatch. A strong koruna helps you if you earn abroad, since your income buys more koruna, and a weak one hurts. Some lenders accept foreign income, and others require a Czech account with salary history.

Plans to leave. If you expect to leave Czechia in a few years, the flat may be sold or let, and the proceeds will be in koruna while your next life is in another currency. That is a risk on the asset side. Our piece on whether to sell or rent out a flat discusses the choices.

Savings in another currency. Your deposit may be in euros or dollars, and you convert it at the time of purchase. The rate on that day is part of the cost of buying.

A mixed household. One partner may earn in koruna and the other abroad. Then a mismatch exists on one side, and a bank may count the incomes differently.

Interest rate risk is a separate matter

Fixing the rate for a period protects against changes in the rate, not in the exchange rate. Our guide to fixation periods and the explainer on rates and what sets them cover the first risk. For the second, a fixed rate does nothing.

The two risks combine. A borrower with a euro loan at a fixed rate and a koruna income carries currency risk for the whole period. Rates in different currencies also reflect different interest-rate environments, and a lower rate in one currency can reflect a different inflation outlook, which exchange-rate moves may offset.

Ways to reduce the mismatch

The simplest is to borrow in the currency in which your income and your plans are. For most residents that means koruna. Other approaches exist, and each has a cost.

• Match the currency of income and loan. If your income is mainly in koruna, take a koruna loan.
• Hold a reserve in the loan currency. If you borrow in a foreign currency, keep some savings in the same currency to cover instalments for a period.
• Use a smaller loan. The less you borrow, the less a currency move can hurt.
• Think about the exit. Ask what happens if you need to move abroad, sell the flat or let it, and whether the bank allows it.
• Currency hedging products. Banks may offer instruments for businesses and sometimes for individuals; they carry costs and risks of their own and require professional advice.

Whatever you choose, test it against a bad outcome. Ask what the repayment would be if the exchange rate moved against you by a large amount, and whether you could pay.

Reading the offer

If a lender offers a loan in a foreign currency, look at several points. The contract currency and the account from which repayments are taken. The rate used to convert, and who sets it. Whether the bank can require you to repay or add collateral if the exchange rate moves sharply. The costs of converting your koruna income to the loan currency each month. And the regulatory protections: the lender must give you the standard information sheet and state the annual percentage rate of charge (RPSN), and the Financial Arbitrator handles out-of-court disputes about consumer credit.

If you want to test repayments at different rates, the mortgage calculator on Hypoteky.com lets you model a loan and a term. It works with the figures you give it, and so it will not model exchange rates for you. For what foreign applicants meet in practice, Hypoteky.com has a guide to mortgages for foreigners. Our article on whether a non-resident can get a Czech mortgage covers applicants who live abroad.

Frequently asked questions

Can I get a mortgage in euros in Czechia?

Some lenders offer foreign-currency loans, but most Czech mortgages are in koruna. Ask each bank about its conditions.

Is a euro mortgage cheaper?

The headline rate may differ, but the exchange rate can erase the difference. Compare the whole cost under bad scenarios.

Does fixing the rate remove currency risk?

No. A fixed rate protects against interest rate changes, not against exchange-rate moves.

I am paid in euros. Which currency should my loan be in?

A mismatch exists unless the loan currency matches your income and plans. Consider where you will live and earn over the term, and take advice.

A practical next step

Write down, for the next ten years, the currency of your salary, your savings and your likely home. If they all say koruna, the question answers itself. If they do not, bring the page to an adviser and ask the bank how it treats foreign income.

This is a general explainer, not legal, tax or mortgage advice.