Bank Explains: Myths About Home Loans Affecting Young People

After finishing school, it may seem to a young person that life stretches ahead, they want to study, discover the world and not tie themselves down with excessive obligations. That's why a 30-year mortgage can seem frightening, but decisions shouldn't be made based on myths, but rather by weighing the pros and cons of different options.

According to LHV bank statistics, most people take out their first mortgage at around 30 years old, and approximately 20% of borrowers are younger than 26. Many young people start thinking about a home loan as soon as they have a stable income.

Let's see if common myths and fears have any basis in truth.

1. The bank won't give me a loan anyway

It often seems like your income isn't sufficient to get the desired loan amount. Today, however, it's possible to apply for a home loan together with a parent, something that couldn't be done 10 years ago. "In addition to the well-known KredEx guarantee, a young person has the opportunity to take out their first home loan with the help of a parent, which increases financial flexibility and increases the probability of buying the desired home. A parent can thus help as a co-applicant," explains Catlin Vatsel, head of financing for individuals at LHV.

2. Myth: I have to pay off my mortgage until retirement

It's true that 30 years is the maximum period for which a bank can provide a home loan. Such a long period may create hesitation in young people, yet such a long loan period is actually rather beneficial for the borrower.

"Time works in favor of young people, as they have the opportunity to take a loan for the maximum period, which ensures lower monthly payments. Thus loan repayments can be smaller than rental costs," explains Vatsel. "Conditions for young people to buy a home are more flexible and easier than, for example, for families with children. A small studio apartment is a good choice for a first home, since its maintenance costs are usually low. For example, a one-room apartment in Mustamäe, Tallinn, priced at 80,000 euros, could have a monthly payment of less than 400 euros if the down payment is 10,000 euros," Vatsel provides an example.

Typically, the incomes of educated entry-level workers start growing after a few years, which allows them to increase payments and thus shorten the repayment schedule. "The terms of the contract can be changed at any time: for example, shorten the payment schedule and pay a larger amount each month than was set at the time of borrowing," notes Vatsel.

3. Myth: Why should I buy an apartment at all? Renting is easier!

When renting someone else's property, you often pay for someone else's loan, while the value of that property grows over time. At the beginning of renting, you have to pay a significant amount, which includes two to three months of rent, real estate agent fees, and a security deposit. The real estate agent fee is a service fee and the security deposit is often not returned if the apartment is returned in worse condition or if something is damaged. For example, with a 500-euro apartment, the combined loss of agent fee and security deposit is 1000 euros.

"When a young person pays off their own home loan, they invest each month in their own assets, where no one else can dictate the conditions," explains Vatsel. For example, rental apartments often prohibit keeping pets or making renovations according to your own taste. Also, the landlord may ask the tenant to leave at the most inconvenient time. "In your own home, you can be a full-fledged decision-maker and design the surroundings exactly according to your wishes," adds Vatsel.

However, it shouldn't be forgotten that ownership also comes with obligations. You need to keep in mind that all costs associated with the apartment or house fall on the owner's shoulders. It is recommended to have home insurance, including liability insurance, which covers damages you may cause to others.

4. Myth: I plan to travel and work in different countries in the future. A mortgage ties me permanently to one place

Many young people dream of living and working abroad and today's open world offers plenty of opportunities for this, which are worth taking advantage of. On the other hand, this shouldn't be an obstacle to investing in your future, from which you can potentially also earn income.

A purchased apartment can be rented out or sold. Estonia also has no real estate tax, so any amount left from the loan belongs to the apartment owner. Of course, this requires some time and effort, but it may be possible that in the future this could finance your plans in another country.

What does the bank consider when young people apply for a loan?

• Stable income and employment – The bank assesses stable employment and consistent income. Completing a probationary period at work increases the chances of getting a loan.
• Work experience and job stability – The bank considers how long a person has been working in one place to assess job stability.
• Savings – To demonstrate financial responsibility, savings are evaluated. It is recommended to use a savings account or make a time deposit that earns interest. This also shows a person's financial literacy.
• Daily savings opportunities – Banks certainly offer better terms to those who can prove they have developed daily savings habits, even if these are small amounts.
• Co-applicant presence – Getting a loan becomes easier with a trustworthy co-applicant, such as a parent, who provides banks with additional guarantee.
• Down payment – To get a home loan, at least 15% down payment is required. With KredEx support, this amount can be reduced to 10%.