Do I need to pay in full for hostel reservation to show proof of accommodation for a Schengen visa?

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No, only a reservation is required. In fact, it is recommended you do not pay for your ticket (or hotel) until after your visa is secured.

I do not know how hostels operate as I have never stayed in one (except boarding school), but for hotels you generally reserve (with your credit card) and then pay when you check-in.

To do this you must book at the hotel's website and not some third party travel service (like expedia/travelocity/hotels.com) because these properties have pre-booked the rooms and need to sell them to you outright.

For a definitive source on this, you can visit the embassy/foreign mission website of any Schengen member state, or a generic site like schengenvisainfo.com.

Here is a snippet from the Netherlands Embassy in Kuwait (pdf link, relevant info pasted here, with my emphasis):

APPLICATION REQUIREMENTS FOR TOURIST VISA

  1. Duly filled application form with 1 recent photograph (NOT OLDER THEN 6 MONTHS) with white or grey background color passport size.
  2. Passport valid at least 3 months after expiry date of the visa.
  3. Copy of holder page travel document.
  4. Copy of ID card if applicable.
  5. Previous passport if any.
  6. Copy of flight reservation and hotel booking for the entire period of stay in Schengen Area.
  7. Copy of travel insurance, minimum coverage €30,000 (thirty thousand) valid for Schengen Area for the duration of your stay.
  8. The visa fee equivalent of €60.00 (sixty) in KWD, cash only.
  9. Letter from the employer/sponsor stating how long you have been working for the company, what is your designation (position) and how much is your monthly salary (Kuwaiti nationals exempted).
  10. Valid Kuwaiti residence permit endorsed in passport.
  11. Proof of social/ economic ties; original bank statements of the last 6 months (Kuwaiti nationals exempted).

Note that this only applies for tourist visas, for business visas you don't need to show a hotel reservation.

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