Exchange-rate risk (kurzové riziko)
Exchange-rate risk arises when a loan is in a different currency from the borrower's income. A change in the exchange rate then changes the real size of the payment and of the remaining debt, even though the interest rate stays the same. Act No. 257/2016 Coll., on consumer credit, therefore imposes special information duties on the bank for foreign-currency loans and gives the consumer the right to convert the loan into the currency of their income or residence.
Example
A client is paid in euros and repays a CZK 4,000,000 mortgage over 25 years at 5.00 % with a payment of CZK 23,384. If the euro weakens against the koruna by 10 %, he needs roughly 11 % more euros for the same payment (1 / 0.9). Converted back, it is as if the payment had risen to roughly CZK 26,000, a jump similar to a rate increase of about one percentage point.
In practice
Banks in Czechia lend on domestic property practically only in korunas, so exchange-rate risk falls mainly on people paid in a foreign currency, and banks count such income with a buffer. Keep a reserve of several payments and work out what a 10–15 % fall in the exchange rate would cost you. Taking a euro loan just for the lower rate, while your income is in korunas, simply moves the risk onto you.
How it differs
Interest-rate risk changes the payment when the interest rate changes after the end of the fixed period. Exchange-rate risk can change it at any moment as exchange rates move, even midway through a fixed period, and fixing the rate offers no protection against it.
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