Saving for a Mortgage in Latvia: How Changes in the ECB’s Interest Rates Affect Homebuyers

The European Central Bank (ECB) has raised the main base interest rate seven times in a row since July last year, currently reaching 3.75%, directly affecting the well-known interbank lending rate, or Euribor, which in turn is integral to the mortgage rate. credit component. In this way, the ECB is trying to suppress inflation, which is still quite high in the Eurozone and especially in the Baltics and, contrary to initial forecasts, is declining relatively slowly, significantly affecting the purchasing power of citizens. The Central Statistics Office has calculated that last year’s rapid jump in inflation significantly outstripped the increase in average wages, as the real net wages of workers, or the purchasing power of wages, decreased by 8.7%.

On the other hand, one of the sectors of the national economy, where the impact of inflation is most visible, is the construction sector. For example, as a result of the increase in the cost of energy resources, building materials and labor, the prices of new housing increased by an average of 30% last year. Although such a rapid increase in the prices of new housing has not been observed in the market for more than a decade, the interest in energy-efficient apartments in the society still remains high, and banks are currently stimulating their purchase by offering discounts on loan origination fees or even temporarily not applying the rate added by the bank, which provides a significant savings for citizens.

Data from the housing developer “Bonava Latvija” show that at least 75% of new project buyers need a mortgage loan and, therefore, a down payment. At the same time, with the decrease in free funds, the ability of residents to save the necessary amount to make the first payment for the purchase of a home also decreased. How long does it currently take for a household with two workers who meet the conditions for receiving a mortgage loan to be able to save up for the first payment of 120,000 euros for the purchase of real estate in the new project?

“Bonava Latvija” tried to find the answer to this question together with Normundas Dūci, the head of mortgage lending at “Swedbank”, Māris Opinčanas, the head of the Personal Financing Department of “SEB banka” and Jānis Mūrniek, the head of the Private Person Service Directorate of “Citadele” bank.

With an average salary – one is “short”, two are right on time

When purchasing an apartment in the new project, the client’s participation is required in the amount of up to 15% of the transaction amount, which can be reduced to 5% by using the offered state support programs in the form of a guarantee or, in the case of a large family, cover this contribution completely with a state grant, which is awarded 8,000-12 000 euros. In the case of a house worth EUR 120,000, the amount of the required down payment, which customers must provide themselves, ranges from EUR 6,000 to EUR 18,000. At the same time, it should be taken into account that the down payment is only one of the components required to get a bank loan. The second and most important factor is the amount of monthly income of the individual borrower or household.

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According to the data of the Central Statistics Office, the average monthly salary “on paper” in Latvia increased by 7.5% last year, reaching 1,373 euros (1,535 euros in Riga). On the other hand, according to the estimates of the Ministry of Finance, this year the average wage could grow even faster – approximately 8.5%. This means that at the end of the year, Latvian residents could earn 1,490 euros per month on average before taxes, or 1,066 euros “on hand”. However, according to the representatives of all three banks, in order for one borrower to receive a loan for the purchase of a house worth 120,000 euros, the monthly income “on hand” must be at least 1,500, 1,600 euros.

If a household with two employees would like to receive the same loan, the monthly net income of both would have to reach 1,600, 1,700 euros. This means that if you earn a statistically average salary in Latvia, one borrower will most likely be refused a mortgage loan worth EUR 120,000 for the purchase of an apartment in the new project, but it is very likely that a household with two workers earning the average salary will not be refused. Of course, on the condition that the family does not have any existing additional credit obligations.

Discipline and additional sources of income help to save

Speaking about whether and how the savings habits of Latvian residents have changed, Jānis Mūrnieks, head of the Private Person Service Directorate of the bank “Citadele”, admits that, regardless of the current inflation rate, one of the main conditions for the formation of a sustainable savings habit is a defined goal and plan.

“We have observed that a person who saves for a specific purchase, for example, a child’s education or real estate, does so in a disciplined way, allocating a certain amount every month, as well as supplementing it with occasional additional contributions, say, from the paid bonuses. When savings are made only in case there are excess funds left over at the end of the month, then the savings for a person with similar income and expenses grow relatively slower and there is a greater chance that they will be used for some other spontaneous purchase,” says Mūrnieks.

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Swedbank’s head of mortgage lending, Normunds Dūcis, also agrees, adding that income from the sale of another property or support from parents is often used to cover the down payment. On the other hand, Māris Opincāns, head of the Private Person Financing Department of “SEB banka”, also highlights as an important aspect the savings created by the society during the Covid-19, which are still kept in bank accounts by a significant part of people and can be used as an important cushion for saving the first payment.

Mareks Kļaviņš, the chairman of the board of “Bonava Latvija”, states that in the past, accumulative life insurance served as an effective and stimulating way to accumulate funds, receiving back the overpaid personal income tax for the specified term. True, until the time when the law “On personal income tax” was amended and the minimum deposit term of five years was changed to ten years.

“In my opinion, for various reasons, our society has still not developed strong habits that would encourage the accumulation of funds. And especially for that part of the society whose income would allow them to save. Therefore, I am sorry that changes were made in the regulatory framework that determined the procedure for accumulating life insurance. I know people who chose this method to accumulate funds directly for the purchase of real estate, however, the currently established minimum term of ten years of accumulating life insurance is too long, as it is very difficult to plan and react in accordance with the dynamics and changes of the real estate industry in such a term,” believes Maple tree.

With the support of “Altum”, it is possible to save the first installment even within 10 months

The interviewed banking experts agree that the “Altum” guarantee is a significant factor in reducing the down payment and thus accumulating the down payment. In this case, it would take about a year to save 6,000 euros as a down payment for the purchase of an apartment worth 120,000 euros in the new project, carefully following a clear plan.

“If we assume that the average amount of loan payment per month, when borrowing a loan of 114,000 euros for a period of 30 years, is approximately 650 euros, then the family, by putting aside the same amount per month, could save the first installment in even 10 months,” Dūcis argues theoretically. Initially, 650 euros might seem like an excessive amount of money to allocate to savings, however, it should be taken into account that after purchasing the property, the same amount will have to be allocated to the loan payment every month. Therefore, this accumulation period can be used as a kind of preparatory training.

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On the other hand, the representative of “Citadele” bank, Muižnieks, states that if you live a little more freely and put aside 250 euros per month, it would take two years for the household to save up the first payment, at the same time revealing that in order to more successfully achieve the goal, it is recommended to save in a bank account, from which all payments are made on a daily basis , but in a separate account, such as a savings account or term deposit, which will also help to multiply this amount faster. In addition, it will serve as a good confirmation to the lender that your financial flow is stable and you are able to discipline a part of your income for a specific purpose, adds Dūcis.

However, the survey conducted by “Citadeles” shows that 46% of Latvian residents, who have the opportunity to save, choose to do so in cash or in their daily bank account, without taking advantage of the opportunity to increase capital with deposit interest rates.

At the same time, if none of the “Altum” guarantee programs are used, the amount of your share for a house worth 120,000 euros will be 15% or 18,000 euros. “It will be relatively more challenging to accumulate such an amount, and in practice, in such cases, an asset owned by the family is often sold, or the family stays with their parents for the time of saving the first installment, creating a very strict savings plan and allocating, for example, 50% of their income to it, so after realizing the dream of owning a home in the new project as soon as possible,” says Muižnieks.

Māris Opincāns, head of the Personal Financing Department of “SEB banka”, also explains that without the support of state programs, the savings time for the first installment is significantly longer: “According to our calculations, to currently save for the first installment worth 120,000 euros for the purchase of an apartment in the new project without the participation of “Altum” , a person with an average income needs about 60 months. Similarly, both our observations and the data of our survey conducted in February of this year show that a third of the society began to spend their savings during the winter period, which were accumulated during the pandemic. At the same time, at the beginning of this year, the share of Latvian citizens who have no savings at all has increased to 27%. Therefore, regardless of whether residents have plans to change their home or not, it is necessary to create a savings, which, if necessary, can also be used to cover other costs.”

2023-06-10 12:37:57
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