When applying for a home loan, you may receive offers from several places, be it large banks operating in Estonia or financial institutions specialising exclusively in loans. However, the offers received may differ not only in interest rates, but also in the maximum amount. Anne Pärgma, Head of Home Loans at Swedbank, explains what determines the maximum amount offered by a lender and why these offers can vary greatly. As a rule, the first important rule when deciding on a loan and setting the maximum amount is that the applicant’s liabilities cannot exceed half of their income. Such liabilities include loans, leases and credit cards, and if there are several applicants, this rule applies to them all together. However, an applicant who has applied for a loan offer from several places may later find that while one lender offers a maximum loan of 50,000 euros, another bank offers 100,000 euros. People are often confused by the fact that their home bank, where they may have been doing their daily banking for years, has made the lowest offer. However, as mentioned above, the lender does not set the maximum loan amount arbitrarily. When offering loan terms, a number of factors are taken into account regarding the applicant’s financial situation and behavior. Currently, there is no positive credit register in Estonia, which means that lenders do not have an overview of all of the debts and obligations of an individual to other financial institutions. This also means that the applicant’s home bank will inevitably have more information about them than others. However, such a register, which would allow all banks with the individual’s permission to see their obligations in a single environment, is already being created in Estonia and is expected to be launched in 2026. The maximum loan amount is affected not only by existing debts and obligations, but also by the applicant’s general payment behavior, their ability to cope with their existing income and expenses, and their ability to save. Again, this is information that is primarily available to a person’s “home” bank, and which may result in a lower maximum loan offer. But now we come to the heart of the matter. Namely, a conservative approach to the maximum loan amount is useful and necessary, first and foremost, for the borrower. The bank has the opportunity to play out all possible scenarios for the borrower, including bad ones, and make sure that the borrower always comes out on top. A mortgage is a very long-term commitment, on average 26 years in Estonia. Therefore, it is important for both the bank and the borrower to be sure that the borrower will be able to cope with the loan repayments during ups and downs and other changes in the economic cycle. It is also important to consider that over the long term of the loan, situations may arise where the family’s income decreases or expenses increase. Ultimately, a lot comes down to risk – for both the borrower and the lender. Of course, it is also important for the bank to ensure that the loan is repaid on time, but the risks it takes to do so can vary greatly from one financial institution to another. The same applies to the borrower: some people are more confident in assessing the risks they may face in the coming decades, while others are more cautious. Let's imagine that the lending market is like a large and diverse ski resort. In this center, the slopes are very steep and fast, and at the same time gentle and slow. If we assume that a fast slope is a very large loan, and a gentle slope is a much smaller one, then the decision about which slope to ski down will depend on the level of risk, which in the case of alpine skiing will depend on previous skills, and in the case of loans – on the current ratio of income and expenses of the person. A beginner skier can quite successfully ski down a steep slope, but the risk that this descent will lead to, for example, calling an ambulance is also quite high. Similarly, from the lender’s perspective, they are taking a risk by allowing someone to borrow more than their financial situation actually allows. On the other hand, if that risk doesn’t materialize, they will be able to earn more. The same can be said for a ski resort – you can invite a beginner to ski, bringing in ticket sales, but you have to take into account the increased risk of an accident and the subsequent costs. Of course, borrowing more money does not necessarily mean that you will have trouble making payments in the future. There is always a chance that the borrower will be lucky throughout the loan term and there will be no downturns. Unfortunately, however, we can never be completely sure that this will be the case, so it is wise to borrow an amount that will be affordable both today and in 10 years, for better or worse. Obviously, even with the most conservative approach, people can still borrow more than the value of the property they want to buy. But is it wise to max out on what's on offer and borrow more than you actually need in these cases? Probably not. A mortgage is a very long-term financial commitment, and it's probably wise to borrow as much as you need, but as little as possible, regardless of your options.
