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Baltics see eurozone's highest home loan interest rates in October

Apartment buildings in Tallinn.
Apartment buildings in Tallinn. Source: Siim Lõvi/ERR

This October, the average home loan interest rate in the euro area stood at 3.91 percent. Estonia's average of 5.84 percent, meanwhile, was exceeded only by those of Latvia and Lithuania. Bank of Estonia economist Taavi Raudsaar says this can be attributed to the fact that loans in the region are often linked to the Euribor.

According to European Central Bank (ECB) data, home loan interest rates in October averaged 5.84 percent in Estonia, 5.94 percent in Latvia and 5.89 percent in Lithuania.

Other states with higher interest rates also included Cyprus with 5.03 percent, Portugal with 4.51 percent, Greece with 4.58 percent and Luxembourg with 4.18 percent.

Banks in Malta issued home loans with the most favorable terms, where interest rates averaged 2.2 percent. Malta was also the only country whose average interest rate remained below the 3-percent mark.

Raudsaar told ERR that over the past year, interest rates on new housing loans in Estonia, Latvia and Lithuania have been significantly higher than the euro area average because market interest rates, including the Euribor, have increased rapidly, and commonly used in the region are loans linked to the Euribor.

"More widely used elsewhere in the euro area are fixed-rate contracts, and taken into greater account when pricing loans are banks' own long-term funding costs," the Bank of Estonia economist explained. "Fixed-rate loans are relatively cheaper when market interest rates are high, and on the flipside are more expensive when market interest rates are low."

Raudsaar noted that similar logic applies, for example, between fixed-rate electricity plans and market electricity prices. Such reasons rooted in market practices and fluctuations in market interest rates cancel out in the longer term, however even in longer-term comparisons, Estonia's housing loan interest rates remain somewhat higher than the euro area average.

Namely, statistics show that the overall average interest rate on new housing loans in the euro area from 2005 through October of this year is 3 percent. By country, at the lowest end of this ranking stands Finland with a long-term average of 2.2 percent, and at the highest end, Cyprus with an average of 4 percent. Across the same timespan, Estonia has averaged a home loan interest rate of 3.2 percent, as has Lithuania; Latvia's, meanwhile, has reached 3.9 percent.

"This remaining difference can be explained with a smaller market, weaker competition and likely also a somewhat higher risk that borrowers could struggle with their loan repayments, as our income and savings levels are lower than the euro area average," Raudsaar acknowledged.

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Editor: Aili Vahtla

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