Expert Explains: How VAT Increase Affects Mortgage Borrowers

Coop Bank's home loan business line director Karin Ossipova explained that the 22-percent VAT rate coming into effect in January 2024 will affect people's borrowing capacity in several ways. On one hand, VAT raises the price of purchased real estate, and on the other hand, other fixed costs also increase, such as expenses for water, heating, or groceries, which are also taken into account when calculating borrowing capacity.

When calculating the maximum upper limit of a home loan, it is ensured that the borrower's monthly financial obligations do not exceed half of their net income. This way, it is likely that a person will be able to manage loan payments and have money left over for other necessary expenses. "Whereas previously banks calculated the potential borrowing capacity of a home buyer through a risk with an interest rate of six percent, now the calculation is done with the offered interest rate, to which an additional two percent is added, meaning that home loan payments are calculated in banks through approximately eight percent," explained Ossipova.

"VAT is rising on all everyday products. If salaries do not increase and Euribor remains at its current level, the VAT increase will directly affect people's borrowing capacity. The higher the price of the property, the more unattainable it becomes for many people," noted Ossipova.

Ossipova pointed out that over the past year, the maximum possible home loan amount for a borrower has decreased by approximately 15 percent. "This resulted primarily from the rise in Euribor and high inflation. Next year, the VAT increase will have an effect in turn. For home loan borrowers, much depends on what level Euribor will be at in the next year," Ossipova highlighted.

She added that interest rates will eventually start to decline, and if salaries again show a growth trend, people's ability to obtain larger loans and purchase more expensive real estate will also improve.

Real estate developer Endover's head Robert Laud confirmed that the VAT rate coming into force from the new year will affect all residential real estate developers, and the end of this year will bring activity to the sales of new developments. "If you want to buy an apartment in a completed new development and are considering whether to do it now at the end of the year or postpone the decision to the new year, it is in any case more beneficial to conclude the contract in December."

Laud pointed out that for debt obligation contracts concluded during this year, the down payment is currently at the applicable rate, namely a VAT of 20 percent, but if the conclusion of a property rights contract falls into the new year, the new tax rate of 22 percent will already apply.