In the Estonian housing loan market, fixing interest rates have not remained popular in the context of Euribor rates for a long time. According to the banks, however, people can sense it changing at some point if Euribor turns positive within a few years.
Variable rate loans are offered in Estonia on the basis of the six-month Euribor, which according to the latest calculation is at the level of -0.473 percent. Interest on home loans usually consists of a margin and a Euribor rate.
Over the past six years, Euribor has remained negative, with a floor of 0 percent in contracts.
Taavi Raudsaar, an economist at the Bank of Estonia (Eesti Pank) said that setting interest rates at fixed in the housing loan market has never been very common in the Estonian market. "Slightly more was done in 2006-2008. After the global financial crisis, interest rates have mostly fallen and remained at a record low in recent years. Therefore, there has been no reason to fix the interest rate, as the risk of their rise has seemed low," Raudsaar said.
"At the same time, banks have not been very active in offering this opportunity to customers," Raudsaar noted.
In the case of variable rate loans, the risk has to be carried by the loaner and there is no direct risk for the banks. In order for loaners to have trouble repaying the loan, interest rates should rise high and, Raudsaar said that this cannot be considered probable at present.
Raudsaar said that the six-month Euribor is expected to turn positive in the financial markets in 2023. "However, in general, interest rates are expected to remain relatively low even after turning positive. However, money market interest rates depend on many factors and their changes are difficult to predict, so loaners should, of course, be prepared for more drastic changes."
The perception of the risk of a rise in interest rates is low
Larger banks offer the possibility to fix Euribor for a short time. Home loans are usually taken for decades, during which the rise in Euribor must also be taken into account. At the same time, banks are urging people to take their solvency into account when borrowing, even if interest rates rise.
Kadri Haldre, the head of LHV Treasury said that it is difficult to predict the exact movement of Euribor, but according to the forecasts of the money markets, the long-lasting negative Euribor may increase in the coming years.
"LHV has not offered a fixed-rate home loan and customers' interest in such a product has been relatively low. As customers are used to negative Euribor, the risk that base interest rates may rise may no longer be 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 those cases.
"This is exactly what the bank does when calculating the customer's maximum loan amount, to take into account the possible increase in Euribor and keeping in mind the principle of responsible lending," Haldre said.
Evelin Koplimäe, Sales Manager of SEB's private customer department said it is not non-existent against fixed rates. "On average, three percent of new housing loans issued by SEB last year have a fixed interest rate, but in recent months, customers' interest in fixing an interest rate has increased somewhat," she said.
SEB Bank offers the opportunity to fix the interest rate for up to five years in order to hedge risks.
"At the same time, certain restrictions must be taken into account when using it. Fixing the interest rate cannot be used when using a loan in installments, because the bank cannot generally provide a loan resource with the same interest rate for a longer period of time," Koplimäe said.
It must also be taken into account in the case of a fixed interest rate that in such a case, in the event of a fall in market interest rates, repaying the loan or making the interest rate floating may be costly for the borrower, Koplimäe noted.
Koplimäe pointed out that if we take, for example, the average housing loan issued by SEB for €100,000 with a term of 30 years and the average market interest rate of two percent, plus Euribor, the monthly repayment of the loan will be about €370.
If Euribor rises to one percent, the loan payment would increase by €52, and if it increases by 2 percent, €107. However, if Euribor were to rise to 5 percent, monthly loan payments would increase by around €295, which would mean an additional cost of around €3,540 per year.
"Whether the best solution is an unfixed or fixed interest rate for an agreed period is up to each borrower to decide. Depending on the money market situation and changes in key interest rates, both may be more appropriate for the borrower," Koplimäe said.
Anne Pärgma, Swedbank's Head of Housing Loans said the bank offers a housing loan with a fixed Euribor for six months. "The interest rates on fixed loans are usually higher and the proposed fixation periods of 2-5 years guarantee fixation only for that period," she said.
She said that 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 may affect the family's budget and the repayment of the loan. Others include a decrease in income, increased spending on energy, fuel, family diseases or important events," she added.
Pärgma cited, for example, that for a loan amount of €80,000 and a 22-year loan period, with an interest rate of 2.4 percent, the monthly payment on the loan would currently be €390.33.
In this case, if the six-month Euribor rises to one percent, the loan payment would increase by €40.44, in the case of 2 percent Euribor by €83.18, and in the case of 5 percent Euribor, by €224.27.
Editor: Roberta Vaino