Home Loan ABC: What to Keep in Mind When Buying a Home?

Buying a home is often one of the biggest decisions a person makes in their lifetime. The process may seem complicated and expensive at first glance, but fortunately there are many ways to finance a home purchase, and plenty of tips and considerations to keep in mind when buying a home.

Main home purchase options

• Home loan from a bank: Most people finance a home purchase with a home loan or mortgage loan. When applying for a loan, you need to consider your income and existing loan obligations. You also need to have sufficient down payment, which is typically 15-20% of the property value. Young families and specialists can use Kredex guarantees to reduce the down payment. Buyers of energy-efficient homes can get the lowest possible interest rate with a Green Home Loan.
• Collateral: The purchased real estate is pledged as collateral for the loan. The collateral should be debt-free and meet bank requirements, typically 50-70% of the property's market value.

How to get a home loan without problems?

Getting a home loan depends on regular income and collateral:

• Income: The bank assesses a person's income to ensure they have sufficient financial resources to make loan payments. The bank considers income such as salary, rental income and dividends according to different percentages. Income should cover daily expenses and payments, and no more than 50% of total income should go to monthly financial obligations.
• Dependents: The number of dependents also affects borrowing capacity.
• Maximum loan amount: On LHV bank's website, you can independently calculate the maximum loan amount with interest rates of 6-7%.
• Credit history – for the bank, a correct payment history is important, one that is free of asset seizures, bailiff-imposed obligations and short-term loans.

Tips for recognizing the best loan terms

A home loan directly affects the family budget for the next 20-30 years. As it is sometimes joked, a home loan binds two people more strongly than marriage.

Often home buyers make lending decisions based solely on one bank or another's interest rate and the principle that the lower the interest rate, the better. This seems logical at first glance, but in the longer term, such a strategy may not be the most profitable, and you need to look beyond the interest rate – which is undoubtedly important – at other conditions offered by the bank, which will be discussed below. When signing a loan agreement, you should consider your family's income and expenses. A careful and accurate calculation made today creates a solid foundation for the future, so that the loan is affordable and worthwhile.

When taking out a loan, pay attention to these aspects:

• Interest rate: The interest rate consists of the bank's margin and the additional (common in Estonia) 6-month euribor. To date, the lowest interest rates from banks have reached 1.7 percent + 6-month euribor. The most favorable terms are offered in the form of a green home loan for the purchase of energy-efficient homes. When buying an energy-efficient home, future living costs are significantly lower than in a building with lower energy efficiency.
• Bank's everyday banking fees: Make sure your banking services are affordable and convenient.
• Contract and notary fees: The fee for concluding a loan agreement can be higher than expected. From time to time, banks run campaigns through which it is possible to get a loan without a contract fee, which is an important saving. Additionally, pay attention to who pays the notary fees, as this is also a significant expense.
• Payment schedule: Think about the loan repayment schedule and the method of interest calculation (annuity or equal principal).
• Euribor fixation: Consider fixing euribor if you want certainty and want to avoid unexpected interest rate increases. However, it should be kept in mind that fixed interest is not today's euribor, but behind it is a longer and more detailed risk calculator, and certainly this percentage is higher than the current six-month euribor.
• Contract modification fee: Inquire about the fees and terms for modifying the contract. Life is constantly changing and there are many different reasons that may create a situation where you need to renegotiate the contract.
• Loan repayment terms: Familiarize yourself with the loan repayment options if you wish to repay the loan early. Some banks charge an additional fee for this.
• Payment holiday option: Make sure you have the option to receive a payment holiday if needed and what are the conditions for obtaining it.
• Real estate valuation: Inquire whether the bank has the right to request additional valuation if the property value changes.
• Bank service quality: Also evaluate the quality of bank services, such as speed of decision-making and availability of loan managers.

Purchasing a second home

If you have already taken out a home loan before and want to purchase new real estate, consider the following options:

• Selling existing real estate: Sell your current property and use the proceeds to cover the outstanding loan balance and as a down payment for the new home loan.
• Keep your existing home and buy a new home using your current home as collateral: If you want to keep your current property and buy a new one, you can consider paying two home loans. Given that in this case you cannot cover the new home loan down payment from the sale of the old home, you must find your own funds or replace the down payment with the old home as collateral. Until now, the myth has been stubbornly spreading that a new loan can only be taken from the home bank from which the first home loan has already been taken. In reality, there are opportunities in the market to refinance or transfer your existing loan from one bank to another with a zero euro contract fee to a new bank, so you can conveniently use both properties as collateral.

Article author: Catlin Vatsel, LHV Head of Personal Financing