Building savings is historically one of the most popular financial products in the country. We can define it as a non-purpose saving in which the client is entitled to receive state support under the conditions stipulated by law. Closer to the deposit part of construction consumption in the savings section.
However, building savings has a loan part. While the deposit part is non-purpose and therefore the client can use the state support from building savings for any purpose, the loan part of building savings is ALWAYS tied to the purpose in the form of housing needs. In building savings we distinguish two basic types of loans:
(1) Regular building savings loan
The client is legally entitled to this type of loan. However, it must meet three defined conditions:
- building savings contract must be active min. 2 years
- the contract must save a certain amount of money (usually 40% of the target amount)
- At the same time, the so-called rating number (rating coefficient) must be fulfilled – this affects the balance amount and the time the money is deposited on the contract (the more money the client has on the contract and the longer the contract is)
Once the client meets all the above conditions, the so-called target amount is allocated.
The client is informed by a letter from the building savings bank that he / she can obtain a proper building savings loan. Suppose he concludes a contract for the target amount of 100 thousand. USD, immediately after the conclusion of the contract will deposit 40 thousand. USD, thereby fulfilling condition 2, will wait two years to meet condition 1, and because he put rel. high amount, which is stored on the contract for a sufficient period of time, usually also fulfills condition 3 after approximately 2 years, gets the loan up to the target amount (approximately USD 45,000 will be the balance after 2 years, including state support and interest, and the rest, USD 55,000, is the amount of the loan)
The benefits of a regular loan are as follows:
- the interest rate does not change during the whole period (it is given by the building savings contract and its amount is already known to the client at the time he concludes the contract – the contract defines both the interest rate on savings and the interest rate on a regular loan)
- the client can make extra deposits at any time and thus reduce the loan
- the client can repay the loan at any time
Until the client fulfills all conditions for the allocation of the target amount, the client can use the second type of building savings loan:
(2) Bridging loan (intermediate loan)
A bridging loan is a loan that you can apply to a building society if you do not have the conditions for granting a regular loan. If the client does not have concluded building savings and wants to borrow money from the building savings bank, he has no choice but to apply for a bridging loan (because he did not fulfill the condition of 2 years). Even if he has deposited 40% of the target amount into his account immediately after the building savings contract has been established, he will still lack the condition of the required level of the evaluation number.
The basic features of the bridging loan include:
- it usually has a higher interest rate than a regular loan (the rate is influenced, for example, by whether the client has been saving with the savings bank for some time and the savings bank knows its ability to create savings)
- the loan is not reduced by installments – only the interest is repaid on the loan account and the client saves on the deposit contract and waits for the loan to be met – only when this happens will building savings be used to redeem part of the debt and to the regular loan regime (since the principal is not reduced by repayments throughout the bridging loan phase, as is usual with a mortgage loan, the client still pays interest on the original loan amount, the bridging loan is therefore one of the more expensive loan products)
- only some building societies allow bridging loan (principal) to be reduced by extraordinary repayment – the deposit can be deposited in the building savings account and thus obtain a regular loan, but it is not an effective saving of savings, because state aid is credited to deposit max. USD for the year and the building savings account without state support is not significantly interest (in the years 2016 – 2017)
The interest rate on savings is around 1%
The logical question arises from the above: In what situation does the bridging loan pay off (eg against a mortgage)? In a situation where the client takes a lower loan (in the order of several hundred thousand USD) and can therefore use the loan without collateral of the property (by definition mortgage means a loan always with a mortgage pledge). Conversely, if a client needs to borrow a higher amount (eg to buy a property from USD 800,000 or more), then it proves to be a financially safer mortgage.