Floating rate loans are offered in Estonia based on the six-month Euribor, which according to the latest calculation is at the level of -0.473%. Interest on home loans usually consists of a margin and an Euribor rate.
Over the past six years, the Euribor has remained negative, with a floor of 0% in the contracts.
Taavi Raudsaar, an economist at the Bank of Estonia (Eesti Pank), said that fixing fixed interest rates in the housing loan market has never been very common in the Estonian market. “A little more was done in 2006-2008. After the global financial crisis, interest rates mostly came down and remained at an all-time high in recent years. Therefore, there was no reason to fix the interest rate, as the risk of them rising seemed low,” Raudsaar said.
“At the same time, banks have not been very active in providing this opportunity to customers,” Raudsaar noted.
In the case of variable rate loans, the risk must be borne by the lender and there is no direct risk for the banks. For lenders to struggle to repay the loan, interest rates would have to rise and, Raudsaar said, that cannot be considered likely at this time.
Raudsaar said the six-month Euribor is expected to turn positive in financial markets in 2023. “However, in general, interest rates are expected to remain relatively low even after turning positive. However, market interest rates monetary depends on many factors and their changes are difficult to predict, so lenders should, of course, be prepared for more drastic changes.”
Perception of the risk of a rate hike is low
The major banks offer the possibility of fixing the Euribor for a short period. Home loans are usually taken out for decades, during which the rising Euribor must also be taken into account. At the same time, banks are urging people to consider their creditworthiness when borrowing, even as interest rates rise.
Kadri Haldre, LHV’s head of treasury, said it was difficult to predict the exact movement of Euribor, but according to money market forecasts, the long-duration negative Euribor could rise in the coming years.
“LHV has not offered a fixed rate mortgage and customer interest in such a product has been relatively low. is perhaps more well known,” Haldre said. .
Banks advise customers to calculate the loan amount with a higher interest rate, in order to be sure that they will be able to repay the loan even in these cases.
“This is exactly what the bank does when calculating the maximum amount of the customer’s loan, to take into account the possible increase in Euribor and keeping in mind the principle of responsible lending,” said Haldre.
Evelin Koplimäe, SEB’s private customer service sales manager, said he’s not non-existent against fixed rates. “On average, three percent of new home loans issued by SEB last year have a fixed interest rate, but in recent months customer interest in fixing an interest rate has somewhat increased,” she said.
SEB Bank offers the possibility of fixing the interest rate for up to five years in order to cover the risks.
“At the same time, certain restrictions must be taken into account when using it. Fixing the interest rate cannot be used when using an installment loan, since the bank usually cannot provide a loan resource with the same interest rate for a longer period of time,” said Koplimäe.
It should also be taken into account in the case of a fixed interest rate that in such a case, in the event of a drop in market interest rates, repaying the loan or floating the interest rate may be costly for the lender. borrower, Koplimäe noted.
Koplimäe pointed out that if one takes, for example, the average home loan issued by SEB for €100,000 with a term of 30 years and the average market interest rate of 2%, plus Euribor, the Monthly loan repayment will be approximately €370.
If the Euribor rises to 1%, the repayment of the loan will increase by €52, and if it increases by 2%, by €107. However, if the Euribor were to increase to 5%, the monthly loan payments would increase by around €295, which would mean an additional cost of around €3,540 per year.
“It is up to each borrower to decide whether the best solution is a fixed or non-fixed interest rate for an agreed period. Depending on the money market situation and the evolution of key interest rates, both can be more appropriate for the borrower,” Koplimäe said.
Anne Pärgma, head of home loans at Swedbank, said the bank offers a home loan with a fixed Euribor for six months. “Interest rates on fixed loans are generally higher and the offered fixing periods of 2 to 5 years guarantee fixing only for that period,” she said.
She said Euribor will not rise unexpectedly and it is easy to follow the trend. “I would like to point out that the change in Euribor is one of the possible factors that can affect the family’s budget and the repayment of the loan. Others include a drop in income, an increase in energy expenses, fuel, family illnesses or significant events,” she added.
Pärgma quoted, for example, that for a loan amount of €80,000 and a loan period of 22 years, with an interest rate of 2.4%, the monthly payment on the loan would currently be €390.33. €.
In this case, if the six-month Euribor increases to 1%, the repayment of the loan would increase by €40.44, in the case of a 2% Euribor by €83.18 and in the case of an Euribor at 5%, €224.27.