While the base interest rate on home loans in Estonia this January stood at 2.6 percent, the base rate in Finland and Sweden stood at 0.8 and 1.52 percent, respectively, according to European Central Bank (ECB) figures. Estonian banks have justified the significant difference with the fact that Estonia has different loan products and a different risk level than its Nordic neighbors.
Comparing the base interest rates charged on home loans in Estonia and other nearby countries, in recent years, the base rates have been highest in Latvia and Estonia, and significantly lower in Finland and Sweden.
The rate in Latvia, in turn, has always been higher than Estonia's, with the exception of December 2018, when the average base rate stood at 2.55 percent in Latvia and 2.65 percent in Estonia.
At the same time, the base rate in Lithuania stood at 2.35 percent, in Sweden at 1.49 percent and in Finland at just 0.88 percent.
Commenting on the major difference between base rates, Sille Hallang, head of Private Customers Banking at SEB, told ERR that generally speaking, home loan conditions in Estonia, Sweden and Finland, for example, cannot be compared directly because the loan products in question are not the same.
"For example, home loans in Sweden operate on a different basis than those in Estonia," Hallang said. "The interest periods on both base rates and margins are shorter, and thus the loan's risk level is different."
She added that Finland's home loan market has been influenced for years by covered bonds and money from local funds, while the covered bond market is only just starting to develop in Estonia.
Anne Pärgma, head of Home Loans at Swedbank, noted that the difference may also be related to how interest rates change during the loan period.
"From the Baltics' point of view, the loan market and the loan contract conditions regarding changes to the base rate are similar," Pärgma said. "As a rule, the contract includes a combination of a six-month Euribor rate plus margin."
The margin is personal and is shaped by several factors, such as the borrower's risk profile, credit history and the total loan amount. According to the Swedbank representative, the margin of a borrower with a stronger financial profile may fall below the average margin.
Swedbank's average home loan margin is 2.2 percent in Estonia, between 1.9-2.9 percent in Latvia and 2-3 percent in Lithuania.
Pärgma noted that when analyzing the average interest rate on home loans in Estonia, loans with a loan period of over ten years should be taken into account.
Commenting on the difference in interest levels by market, LHV communications director Priit Rum said that one should definitely bear in mind that these are first and foremost loan products tailored to local conditions.
"Different risk levels and interest levels apply in different countries," Rum said. "For example, a different currency is in use in Sweden, and there are different banking systems when it comes to liquidity, for example, and different financing costs, i.e. the cost for the lender of loaning out money."
He added that in the Estonian context, capital requirements for banks have increased significantly in recent times, and loans' interest margins have increased as a result. Interest levels are likewise influenced by competition on the market.
"Thus the situation in Estonia is somewhat different than in the Nordic countries, and financial terms and conditions here correspond to the market's risk level," Rum said.
Editor: Aili Vahtla