Options to limit housing loan interest increase

25.08.2015

A young couple, Marko and Pille are planning a future together. These plans include a home of their own, which requires taking a loan.

Both earn the Estonian average salary (median) of 650 euros a month. Therefore, the monthly family budget is 1300 euros. The family`s monthly expenses include utilities (90-130 euros) and car leasing payment (150 euros), other car-related costs like insurance, fuel etc (150 euros) and money spent on food, smart devices and hobbies (300-400 euros).

With Nordea bank`s maximum loan sum calculator , Marko and Pille find out how much they can afford to pay for a home with a bank loan. According to the calculator, the maximum sum of loan is ca 50 000 euros with a loan period of 25 years and a monthly loan payment of 239 euros (with a 3% interest rate).

Taking a bank loan seems like a good idea considering the current low Euribor level, though even with this loan payment, the monthly budget becomes rather strained. Researching loans online, Marko realises with shock that Euribor has not always been so low and such a change may significantly affect their loan payment sum in the future:

  • Today, 6 month Euribor is ca 0.05%, which with a housing loan 2% margin makes Marko and Pille loan payment ca 198 euros;
  • Euribor rising to 3% would mean a total loan costs of  5%, which brings the loan payment to 320 euros;
  • Euribor at a level of 5% would mean a 7% total cost on the loan, which would come to a monthly payment of 403 euros.

The difference in the loan payment compared to the current potential payment would be so large in case of these scenarios that the young family would have problems covering their loan payment with their current income.


Marko and Pille look at the options of fixing the loan payment for the first five years, because this is when the loan sum is the largest and the share of interest costs the highest.
They find out from the bank that they have two options:

  1. Limit on interest increase
    In case of a housing loan with a limit on interest increase, the maximum interest is fixed. If the general interest rate rises, then the loan interest does not rise above the fixed limit. Below the maximum interest limit, the loan interest fluctuates according to market changes.
    The bank offers Marko and Pille a limit on the interest rate increase, whereby 6 month Euribor does not rise above 1% within 5 years. The additional cost is 0.42%, which is added to the loan margin in the next 5 years.  
    The limit on interest increase is similar to insurance and it is possible to pay for it with monthly payments over 5 years 0.42% (ca 17.5 euros a month) or a lump payment of ca 1000 euros. If you choose monthly payments, then please consider that if the loan is terminated earlier, then the “residual instalment payments“ must be covered.  
    Marko and Pille`s first loan payment will increase by ca 17.5 euros and the additional cost for the first year is ca 210 euros.
  2. Interest protection Collar
    With an interest protection agreement, 6 month Euribor maximum and minimum levels are fixed for a period of five years, thus creating a fluctuation range for the interest expense.
    The bank offers Marko and Pille interest protection for Euribor between 0.85% – 1.40%, which would cap the maximum loan expense at 254 euros (calculated on the first payment with interest of 3.40% = 1.40% + 2%).
    Compared to acquiring a limit on interest increase, the interest cost will go up considerably with interest protection, however, if the loan agreement is terminated before term during 5 years, no additional expenses arise like the repayment of “instalments“ etc.
    Marko and Pille`s primary loan payment will go up by ca 33 EUR a month and the additional cost for this product during the first year is ca 334 euros. This sum is comparable to their current smart phone costs.

Why and what to choose?
Pille works as a mathematics teacher and puts together the following table on the basis of the information they received from the bank::

 

Euribor today + margin

With 1% interest increase limit today

1% interest increase limit maximum expense

Interest protection Collar minimum expense

Interest protection Collar maximum expense

In case 6k Euribor is 3.00%

Total interest cost 2,049% 2,469% 3,4200% 2,850% 3,400% 5,00%

1 year

1 012

1 219

1 689

1 407

1 679

2 469

2 years

983

1 185

1 641

1 368

1 632

2 400

3 years

954

1 150

1 593

1 327

1 583

2 329

4 years

924

1 114

1 542

1 285

1 533

2 255

5 years

818

985

1 365

1 137

1 357

1 995

Total

4 691

5 653

7 830

6 525

7 784

11 447

 *The calculation is approximate and may differ from the terms and conditions offered to you. The calculation is based on figures from August 2015.

The table indicates that even if Euribor reaches 3% only at the beginning of the last year, bank offered products save at least 630 euros during the year. Pille understands that if Euribor were to increase during earlier years, then their family would gain even more if they took a loan with a limit on interest.

If Euribor does not rise higher than the current levels, then in case of interest increase limit over 5 years, the additional cost will amount to ca 1000 euros and in case of interest protection, ca 1834 euros.

Marko and Pille opted for interest protection Collar, because it is possible that after some time, they will be able to repay the loan ahead of schedule. While our couple is agreeing on the limit on interest with their Loan Consultant, economic forecasts do not foresee Euribor increasing in the coming months and therefore, the price of interest protection is low.


In order to determine which interest restriction product is suitable for your family, contact a Nordea Loan Consultant or submit an electronically filled in loan application. Read the additional information and terms and conditions on the bank`s homepage.
 
In order to make an appointment for loan consultation at a suitable bank officecall Customer Support at  6 283 300 or write eesti@nordea.ee

 
For example, if you take a housing loan in the sum of 50 000 euros, with an unfixed loan interest of 2.05% a year, loan period  300 months and contract fee 500 euros, then initially, the credit rate of return is 2.138% a year. The loan security must be insured for the duration of the loan period, but the size of insurance costs depends on the insurance provider the loan recipient chooses and insurance terms and conditions and therefore, is unknown to the loan provider. The loan recipient will pay the state fee and notaries` fee for establishment of security.

With a housing loan you can buy, build or renovate a home.
Read more about the conditions of the loan, so that you can act quickly when you find the right home.
You need to insure the real estate collateral of a housing loan throughout the whole term of the loan.
We offer home insurance contract, which you can sign together with the loan contract.
In partnership with ERGO we offer to our customers
loan insurance which gives you a sense of security for unforeseen situations.