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Baltic home loan interest rates highest in EU

Lasnamäe district in Tallinn.
Lasnamäe district in Tallinn. Source: Ken Mürk/ERR

The interest rate on home loans reached its highest level in 14 years during the second quarter. The current interest rate of 5.12 percent is more than three percentage points higher than it was during the second quarter of last year.

"The main driver of the rise in borrowing costs has been the European Central Bank's monetary policy, which has the objective to prevent overly fast price inflation. As a result, the Euribor has risen and more than 90 percent of home loans in Estonia are tied to the Euribor," Taavi Raudsaar, an economist at the Bank of Estonia (Eesti Pank), explained.

"Comparing mortgage rates in the Baltic states shows that they are the same," Anne Pärgma, head of Swedbank's home loans, said.

"The average margins are about 1.8 percent, plus the base rate and Euribor, so those who take out a housing loan today will start paying back the loan with an interest rate that is close to six percent," Pärgma explained.

Estonia, together with Latvia and Lithuania, has the highest mortgage interest rates in the euro year. In fact, Estonian housing loans have been above the euro area average for the last seven years. The euro area average interest rate was 3.69 percent in June.

"Competition in the finance sector is somewhat lower here: we have a smaller market, fewer banks. The second reason is that the cost of money for the banks themselves is more expensive as well, perhaps related to the border with Russia and its aggressiveness. And if we compare it with many western European countries, our incomes are still lower, the risk that a person will get into distress is a little higher, and banks may be pricing that risk into the interest margin, and so the margin is higher," Raudsaar said.

Estonia has the highest interest rates on loans to businesses in the euro area, several percentage points above both the euro area average and the lowest rates in Belgium.

"The funding costs of Estonian banks have increased. As a result of the risk premium associated with being located in a small, illiquid Baltic market near to a war zone or frontline state, the cost of money for all banks has increased, and the margins reflect this. Perhaps Belgian businesses with a lengthier history are somewhat less risky in the middle of the market than Estonian businesses with a history of between 10 and 20 years," Artjom Sokolov, head of corporate banking at SEB, explained.

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Editor: Mari Peegel, Kristina Kersa

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