Home loan customers hoping for low interest rates to remain intact

 In Estonia, variable rate loans are based on the six-month Euribor, which is now at -0.473 percent according to the most recent computation. A margin and a Euribor rate are commonly included in house loan interest.

Euribor has stayed negative for the past six years, with a contract floor of 0%.

Setting fixed interest rates in the housing loan market has never been very prevalent in the Estonian market, according to Taavi Raudsaar, an economist at the Bank of Estonia (Eesti Pank). "In 2006-2008, a little more was accomplished. Interest rates have largely declined since the global financial crisis and have remained at record lows in recent years. As a result, there was no reason to set the interest rate because the probability of a rise appeared to be low "According to Raudsaar.

"At the same time, banks haven't been particularly aggressive in presenting this chance to customers," Raudsaar said.

In the case of variable rate loans, the risk must be borne by the borrower, and the banks have no direct risk. Interest rates would have to climb significantly for loaners to have difficulty repaying the loan, something Raudsaar does not believe is likely at this time.

In 2023, according to Raudsaar, the six-month Euribor is likely to turn positive in the financial markets. "However, even after becoming positive, interest rates are projected to remain low in general. Money market interest rates, on the other hand, are influenced by a variety of factors and are impossible to predict, so borrowers should expect more severe adjustments."

Larger banks provide the option to fix Euribor for a limited time. Home loans are typically carried out for decades, during which time the rise in Euribor must be factored in. Banks, on the other hand, are advising customers to consider their solvency when borrowing, even if interest rates climb.

According to Kadri Haldre, the chairman of LHV Treasury, it is difficult to foresee the exact movement of Euribor, but the long-term negative Euribor may increase in the next years, according to money market estimates.

"LHV has never issued a fixed-rate house loan, and interest in such a product has been minimal. Because clients are accustomed to negative Euribor, the risk of rising base interest rates may be overlooked "Haldre remarked.

Customers are advised by banks to calculate the loan amount using a higher interest rate to ensure that they would be able to repay the loan even under these circumstances.

"This is exactly what the bank does when determining the customer's maximum loan amount, taking into consideration the possibility of an increase in Euribor while keeping the idea of responsible lending in mind," Haldre explained.

It is not non-existent versus fixed rates, according to Evelin Koplimäe, Sales Manager of SEB's private customer department. "On average, 3% of new house loans given by SEB last year had a fixed interest rate, but customers' interest in fixing an interest rate has increased slightly in recent months," she said.

To mitigate risk, SEB Bank gives the option to lock the interest rate for up to five years.

"At the same time, when using it, certain limitations must be considered. Because the bank cannot generally give a loan resource with the same interest rate for a longer period of time, fixing the interest rate cannot be used while using a loan in instalments "According to Koplimäe.

In the case of a fixed interest rate, it must also be considered that, in the event of a drop in market interest rates, repaying the loan or making the interest rate floating may be costly for the borrower, according to Koplimäe.

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