Recently, there has been fierce competition between banks to offer better housing loan terms to those who already have one, but want to get even more favourable terms. A Citadele expert explained what exactly refinancing a loan means, when it is worth thinking about it and what questions to ask the bank. Marina Hakiainen, Head of Retail Banking at Citadele, explained that due to the rise in Euribor and Estonia’s weak economic indicators last year, the number of new housing loans has significantly decreased, but the terms have improved: “New loans are issued with a lower interest rate, and it has also become possible to get better terms on existing loans. Refinancing a loan means, for example, that if another bank offers more favourable terms on your loan, you transfer your loan to that bank or, for example, combine two housing loans into one. It is recommended to regularly monitor the margin on an existing loan. This will help you stay informed, better assess the need for refinancing and make better decisions." Monthly home loan payments are most dependent on changes in Euribor, and for larger amounts, the bank margin also has a significant effect. Banks take many different factors into account. "For example, has the household income increased compared to the previous period? Have other credit and leasing obligations decreased during this time? Increased income means less risk for the bank and the opportunity to offer more favourable terms," Hakiainen explained. It is also taken into account whether the value of the property has increased significantly. "Many people ask whether the presence of a KredEx surety is an obstacle to refinancing. The answer is no, it is not," she noted. It is important to take into account and include in the calculations the contract fee, notary fees and other expenses that may arise during the refinancing process. "However, recently banks have increasingly offered reimbursement of refinancing-related expenses," Hakiainen said. – For example, at Citadele we currently reimburse notary fees and real estate appraisal costs to a certain extent.” In addition to your home bank, it is worth exploring the options offered by other banks. “It is also important to pay attention to the fees for everyday banking services, which may well cancel out the financial benefit gained from the new interest rate,” added Hakiainen. When refinancing a loan, it is often recommended to extend the loan term to the maximum again, but others advise against this. Which option should you choose? “Of course, it depends solely on the person’s preferences. Financially, it is a double-edged sword. As a rule, if you extend the loan term to the maximum again, for example, to 30 years, the monthly payments will decrease, but the total amount of payments for the entire loan period will be higher,” said Hakiainen. At the same time, for many, an important argument is that the value of money decreases over time: “So today you can buy much more for 10,000 euros than you can in 30 years.” One argument is that if the monthly loan payment is lower, a person will have more money left over, which they can use for other purposes, for which they would otherwise have to take out additional, more expensive loans, such as consumer loans, installments or use a credit card. A home loan is still the cheapest of all credit products. Let’s say you have a home loan with a balance of 150,000 euros, the interest rate on which is 2.5% + 3.408% Euribor, and you have 20 years left to pay. In this case, the monthly payment is 1,066 €. If this housing loan is refinanced under very favourable conditions, for example, at an interest rate of 1.45%, and the loan term is extended again to 30 years, the monthly payment will decrease to 792 euros. The client will thus save 274 euros per month, but will end up paying 29,207 euros more over the entire loan period, since the repayment term will be extended by 10 years. If, with the same refinancing, the loan term is left at 20 years, then, thanks to the lower interest rate, the monthly payment will decrease to 978 euros. This means that each month you will have to pay 88 euros less, which over 20 years will result in savings of more than 21,000 euros. “As you can see, extending the loan term is a very individual decision that can significantly affect the amount of the monthly payment and the total amount of payments. In any case, when refinancing a loan, you should carefully study your options and talk to bank representatives, as the conditions can vary significantly, – Hakiainen noted, adding that it is always possible to partially or fully repay a home loan with a three-month notice. – In addition, refinancing a home loan is a good way to review the terms of your contract and, if desired, change them: extend or shorten the loan term, change or exclude a guarantor or co-borrower from the contract, or even free up additional collateral.
