Banks' interest margins on home loans could decrease slightly

Apartment buildings.
Apartment buildings. Source: Priit Mürk/ERR

As a result of the increase in Euribor, banks' interest margins on home loans have decreased to between 1.7 and 1.8 percent. There is still some room for margins to decline, but we will not soon see numbers comparable to 2005 - 2008, when loans were available with margins of 1 percent or less.

According to the Bank of Estonia (Eesti Pank), banks' margins on home loans dropped from 3 percent to about 1 percent in one year in 2005, where they remained for three years.

"There were even customers who received loans with an interest margin of 0.5 percent, but the average interest margin between 2005 and 2008 was about 1 percent. During this period, many large Nordic banks entered the Estonian market; the rivalry for market share was intense," Taavi Raudsaar, an economist at Eesti Pank, explained.

In the near future, Raudsaar does not anticipate margins to collapse to such a low level, but if Euribor continues to rise, there may be some room for a slight decline.

"The market expects that Euribor peaks in the second half of this year, and then it could go down slightly, but not to zero, rather between 2 and 3 percent, or a little over 3 percent," he said.

Swedbank currently offers home loans with a margin of about 1.8 percent.

"I believe there is some space for flexibility," Tarmo Ulla, head of private banking at Swedbank, said. "The economic conditions, competition and people's ability to pay have a significant impact on pricing."

Coop Bank, a relative newcomer to the financing market, offers home loans with interest rates beginning at 1.7 percent and Paavo Truu, the bank's financial manager, said he that he sees no room for a reduction.

"We do not see any space for a decline right now. If you recall the previous period, when margins were significantly narrower and then Euribor went to zero and negative, those institutions that conducted transactions with 0.5-0.6 percent margins regretted their decision and lessons were learned," he said.

The European Central Bank will discuss a new interest rate hike in mid-June.


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Editor: Merili Nael, Kristina Kersa

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