How Does it Work?

Buildings savings »  How Does it Work?

PROCESS OF SAVING

Building savings has two phases:

a) Saving Phase

The person saving usually regularly puts money into their building savings account and the state can give them support. Savings and support from the state on the building savings account gain interest, and this interest is free from income taxes.

b) Loan Phase

Following the saving phase there is the loan phase which consists of the provision of an advantageous loan from the building savings bank for housing needs. In this way building savings provides an advantageous way to save money and then the possibility of acquiring a favorable loan for housing needs.

STATE FUNDING

Gaining access to state support

Contracts closed by 31 .12. 2003: Users of building savings have access to state support if they are individuals with permanent residence in the Czech Republic and they have a family number assigned by the Czech Republic. People who have more than one contract will only get state support on one of the agreements.

Contracts closed after 1.1.2004 can get state support if:

• They are a citizen of the Czech Republic
• They are a citizen of the European Union who have permission to live in the Czech Republic and have a family number assigned by the Czech Republic
• An individual with permanent residence in the Czech Republic and a family number assigned by the Czech Republic

If somebody fulfills all of the above requirements and has more than one contract signed in one year, state support is only given on the agreement where there person signed asking for it. If there are multiple requests for funding, state support is usually provided on the contract that is signed first, but in the case of multiple contracts, state funding can not exceed a total amount of 3000 CZK on all contracts.

Requirements for state funding

Contracts signed by 31.12.2003: State funding is provided to the client if for five years they haven?t withdrawn any money from their account.

Contracts signed after 1.1.2004: State funding is provided to the client if for six years they haven?t withdrawn any money from their account.

Amounts of state support

On contracts signed by 31.12.2003 that requested state funding by 31.12.2004 (the original version of the regulation): State funding accounts for 25% of the yearly saved amount for a maximum total of 18,000 CZK.

On contracts signed before 31.12.2003 where state funding was requested after 1.1.2005 (according to the new regulation): State funding can account for 15% of the saved amount in the respective calendar year for a maximum of 20,000 CZK.

For contracts signed after 1.1.2004 (according to the new regulation) state funding can account for 15% of the total amount saved in a calendar year up to a total amount of 20,000 CZK.

THE CREATION OF THE BUILDING SAVINGS FUND

Building savings is based on the principle of clients creating combined resources which they can use for obtaining a favorable interest loan for a home, its reconstruction or for the specific housing needs of the client. Each client saves for a period of time (at least 24 months by law) and, after fulfilling set conditions, can be granted a buildings savings loan. If the savings bank has enough resources, the client get something called a bridging loan, which allows the people to finance their housing needs sooner than they could get the full loan from the building savings bank. This type of financing is becoming more and more used amongst clients. The utilization of the so called bridging loan allows for more flexibility within building savings.

THE ROLE OF SAVING CLIENTS

An important and necessary role in the building savings system are the clients who don?t need money for their housing needs, but use this product as an advantageous way to keep their savings.

The state support provided to all clients of building savings is given for two reasons.

Clients who use building savings to solve their housing needs get more money for specific needs.

The major reason for state support of the building savings system is the creation of motivation to save. For the saving client, this provides an incentive for the fact that their savings allow for the possibility for other people to borrow loans through the system. Surveys show that a high percentage of clients, who are not looking to eventually get a loan, still use the savings for their housing needs.

THE SAFETY OF BUILDING SAVINGS

One of the most important attributes of buildings savings is the high degree of its security. Only specialized banks are allowed to provide buildings savings on the basis of a special license. The law limits any high-risk commercial activities of buildings savings banks; buildings savings thus can be considered one of the safest financial investments available.

DIRECT AND INDIRECT EFFECTS OF BUILDING SAVINGS

Buildings savings enables citizens to meet their individual housing needs, and increases interest in housing modernization. One consequence of this is a favorable effect on development of construction production oriented towards housing construction.

Part of the funds invested in buildings savings are thus returned to the state in the form of a higher volume of income taxes paid by construction companies and enterprises operating in related areas, such as the production of construction materials and components, the production of sanitation technology, etc. At the same time, the growth of production and sales influence employment and levels of income. Higher income results in higher consumption, and consequently in higher state budgetary resources.

The direct effects of buildings savings in the area of meeting housing needs, as well as the wider indirect effects, clearly confirm the legitimate existence of buildings savings on the banking market and the legitimacy of state assistance to this product.

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