Average Salary Rose, But What Price Home Can You Buy With It?

Estonia's average gross salary rose to 2,243 euros in the second quarter. The change in tax-free income meant that at the same time, people's net income grew even faster year-over-year than gross salary. What does this mean for a person planning to buy a home, and what size home loan could someone earning an average salary reasonably expect right now?

According to Anne Pärgma, head of Swedbank's housing loan division, a person's monthly net income and existing financial obligations have the most direct impact on home-buying capacity.

"If we take an example of a person earning an average gross salary of 2,243 euros, they would have approximately 1,800 euros left as net income. If they have no other loan obligations, their home loan could reach approximately 119,000 euros. A household where both partners earn an average salary could, under the same assumptions, obtain a home loan of approximately 298,000 euros," said Pärgma.

She stressed that these are illustrative calculations and the actual borrowing capacity of people earning the same salary can vary quite significantly. "This is affected by, for example, existing leases and small loans, the number of dependents, the loan period, and personal equity contribution."

What kind of home can you buy with this?

If a person earning an average salary has a possible loan amount of 119,000 euros and has a 15% equity contribution, they could look at homes priced at approximately 140,000 euros. In the case of two people earning an average salary, the possible purchase price under the same assumptions would reach approximately 350,000 euros. For example, in Tallinn, the first case would allow purchasing a 2-room, approximately 48-square-meter renovated apartment in Mustamäe, and in the second case, a new 5-room townhouse box in one of Tallinn's suburbs.

"Often, the search for a home starts with a property portal, and only after finding something suitable do people inquire at the bank about how large a loan might be possible. Actually, it makes perfect sense to do the opposite: first find out your approximate purchasing power and then start looking at homes within that range," said Pärgma.

Existing obligations also significantly affect borrowing capacity. Since all loan payments combined can consume up to 50% of net income, other monthly obligations reduce the possible home loan amount. "The average salary does provide a reference point, but when assessing actual home-buying capacity, it's most important to consider the whole picture and know your personal borrowing capacity. A home loan is a long-term obligation, and on average it is taken out for approximately 28 years," said Pärgma.

At Swedbank, a customer can receive an automatic personalized home loan offer with just a few clicks, which is based on their own information and provides an overview of the possible loan amount and terms before finding a specific home. "This allows a person to enter the property market with considerable confidence and clear knowledge of what price range they should realistically be looking for a home in. This way, they don't need to start with guesswork or a general calculator," said Pärgma.

However, she stressed that the maximum possible loan amount should not be an end goal in itself when buying a home. "Buying a home should improve a person's quality of life and provide peace of mind, not become a financial burden that requires compromises elsewhere in life."