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What do you need to know about home loan in Estonia in 2024?

You have decided to buy your dream home with a home loan, and now you are faced with many questions when choosing between different banks.

We’ll guide you through all of this. Here are some key items to consider while looking for the best house loan. It is essential to perform extensive preliminary research and consider all factors when selecting a home loan.

Understanding the following is essential when applying for a loan:

  • margin
  • interest rate
  • repayment period
  • impact of additional costs and loan terms

Comparing the offers of different banks and carefully reading the loan agreement terms will help you make an informed and wise decision. A home loan is a long-term commitment, so this decision should be carefully considered.

Can I get a home loan?

Self-financing and home loan

To create a budget for purchasing a home, it is advisable to first investigate your possibilities and the amount of your home loan. If you don’t do this before you begin your home search, you might locate a house that suits you, but the loan decision won’t go through. To prevent such situations, it is advisable to start with the bank.

Note: To qualify for a home loan from the bank, you must have a valid job contract with a single employer and have worked nonstop for at least six months.

Since the house loan is self-financed, a 10–20% down payment of the acquired price is typically required. Again, the amount of the down payment is based on several factors, including how the loan applicant has handled money in the past.

If you do not have part of the deposit, you can usually replace it with an additional guarantee. The value of the extra security is essential to cover the amount of the down payment, and about 30% of the value is still left over for setting up a mortgage. The mortgage is placed on the property that remains collateral for the loan. A mortgage is also placed on the property to be purchased until the loan is paid off. The mortgage is not equal to the loan amount. The amount of the mortgage is entered in the land register. It is always set higher (30%) to ensure that the bank will pay the associated fees (contracts, bailiffs, etc.) in the event that you are unable to repay the loan and your property is placed up for sale.

The simplest method for providing an overview of the loan size is the calculator. They are not entirely correct, but they are available on the websites of several banks.

For example:

The first step is to apply for a loan to ensure your creditworthiness.

Since your home bank is the one who knows you the best and has the most insight into your financial status, we advise starting there. Make sure that you get competing proposals from one or two banks in order to compare the terms and determine the extent of your negotiations.

Note: It’s always a good idea to negotiate for better conditions because the bank’s initial offer could not be set in stone.

Loan terms and conditions

The terms of the loan determine:

  • interest rate
  • repayment period
  • loan amount

Remember that it is very important to carefully read all the terms and clauses of the contract to avoid misunderstandings later.

Some contracts, for example, may impose an early repayment penalty, typically three months’ interest, without prior notification. This is useful information since, in order to prevent paying an extra three months of interest, you must notify the bank of your intention to sell the purchased property as soon as possible, even if it will be after a few years. You don’t have to sell, but the notice allows you to avoid paying extra money. If the sales process takes longer than expected, you can send this message again every three months. For banks, the notification in simple text is enough most of the time.

Interest rate and Euribor

The average interest rate used for lending between European banks, or Euribor, is also used for lending to customers. It is calculated using the average interest rate of approximately 40 European banks. Thus, Euribor is formed based on the bank’s agreement with the highest turnover and credit rating. Larger loans, such as loans for homes and other properties with a set term, are issued in Estonia using Euribor. Generally, such loans are based on a 6-month Euribor. After the specified period, the loan’s interest rate is recalculated based on the current Euribor.

The typical margin for home loans is between 1.7 and 2.5%, plus a 6-month Euribor. Once more, a lot of factors influence the margin, such as the borrower’s financial history, the state of the economy overall, etc.

NB! A number of banks offer more enticing loan terms (e.g., margin 0% + 6-month Euribor for two years, contract fee 0 €, etc.) to stimulate the purchase of energy class A homes. Furthermore, banks have offered fixed Euribor with a significant percentage of Euribor. It is worthwhile to thoroughly consider each offer and look over them all. If you have a fixed Euribor, you will pay a higher interest rate than you would otherwise. For instance, the Euribor may decrease after a year.

Effect of the repayment period

The length of the repayment period affects the size of the loan’s monthly payment and the total interest. The monthly payments will be lower if you select a longer term, but the total amount of interest will increase.

For a loan of 100,000 euros, for instance, the monthly payment may be roughly 600 euros for the first 20 years, but the monthly payment may be roughly 450 euros for the next 30 years, with a significantly higher total interest rate. Loan calculators are helpful once again to acquire this knowledge.

Additional costs

A house loan includes several extra expenses. A real estate expert appraisal or real estate appraisal report must determine a market value before the bank accepts the real estate to be bought or as collateral and places a loan on it.

The data’s location, size, and complexity also affect how much the deed costs. Ask for an offer from various offices. Before ordering the deed, check their website and which offices the bank accepts.

For instance, an expert evaluation of a two-room apartment in Tallinn can range from 180 to 250 euros.

Once the deed has been completed and there is a positive response from the bank, the next step is to conclude a loan agreement. The contract fee for signing a loan agreement differs and mainly depends on the loan size.

Note: You have the right to ask for information from the bank regarding cooperative partners that offer lower prices for ordering the appraisal report. The customer manager at your bank or the brokerage office where you purchase real estate is an additional provider of discounts on loan agreements. The contract fee is typically up to one percent of the loan balance.

A notarial transaction is the next step if the loan arrangement is finalized.

Traditionally, the buyer and seller split the notary costs evenly, with the buyer covering the state charge alone.

The new owner is added to the land register upon payment of the state fee; as this is solely the buyer’s interest, he covers the cost. Additionally, the buyer pays to set up the mortgage. The calculator can also be used to determine notary fees.

The insurance premiums of the real estate being purchased and used as additional collateral must certainly be included in the monthly expenses. Larger banks usually offer their own insurance service, but everyone can freely choose it.

We hope these tips will help you make the best choice for a home loan.

Good luck buying your dream home!

Author: Lii Aalik is a co-founder of KoduLine and a senior broker at level 6.