Bigbank Chief: Young Families Could Buy a New Home If Current Loan Period Restriction Were Removed

The current regulation limiting home loan terms to 30 years is a clear restriction on freedom of choice, forcing young people to live in substandard housing for years or constantly postponing home purchases while chasing rising prices, believes Arthur Taavet, head of Bigbank Estonia.

Finland, Estonia's neighboring country, extended the maximum home loan term to 40 years this summer. "Now young Finns have a better choice when buying a new home—whether to purchase more expensive real estate or choose a lower monthly payment. Estonia could be even more open and allow 50-year home loans on the market or, even better, let each person decide for themselves how long this period should be," suggests Arthur Taavet, head of Bigbank Estonia, as a solution.

According to the bank executive, there is no reasonable explanation why a 20-, 30-, and 40-year-old person should be able to take out a home loan equally for up to 30 years. "Even if we assume that a home loan should be repaid to the bank by, say, age 70, then a 40-year-old could be given a loan for 30 years, while a 20-year-old could get 50 years. This would give young families more opportunities to reach their dream home, instead of paying off a bank loan taken out by a landlord," explains 29-year-old Bigbank head Taavet.

According to the bank executive, Estonia's average inflation over the past ten years has been over 5%, and over the past five years even around 8%. "If this trend continues, then, for example, a 750-euro home loan monthly payment would be worth approximately 340 euros in today's currency in 10 years, 150 euros in 20 years, 70 euros in 30 years, and 30 euros in 40 years. In other words, inflation does its work and the loan becomes increasingly affordable over the years," Taavet makes a quick calculation.

Additionally, according to Bigbank's head, one must not forget that real estate prices will likely continue to grow over time. "If real estate price growth exceeds inflation, the person who can buy a suitable home as early as possible and spread loan payments over as long a period as possible is in an advantageous position. This is also the case if the total cost of loan servicing is higher, because inflation and real estate price increases will most likely make up for it with interest," reasons Taavet.

For the banker, it is incomprehensible why some banks support time restrictions and want to deprive people of a particularly favorable final period, where monthly payments become especially affordable compared to everyday expenses, not to mention barely noticeable. "In my opinion, neither the state nor any bank should decide what is the most suitable solution for one person when buying their own home," comments Taavet and adds that banks' job is to inform people of possibilities and risks, not to restrict their freedom of choice.