The Disappearance of a Tax Deduction Allows Buying a More Expensive Home by Tens of Thousands of Euros

As a result of the loss of the tax-free income allowance, larger sums of money will be deposited into Estonian people's bank accounts on payday this year. Since banks base home loan calculations on net income, this means many people have the opportunity to purchase a more expensive home than before. Anne Pärgma, head of home lending at Swedbank, explains what people's actual opportunities are and what to consider when choosing a home.

Under the new system, a single tax-free income of 700 euros per month, or 8,400 euros per year, applies. Even if gross salary doesn't change, people will receive more money each month. "When net income increases, it is also reflected in borrowing capacity. For home loans, it is the net salary that sets the main limits," said Pärgma. According to her, larger net income provides an opportunity to look more confidently at the real estate market.

Home loan size depends on several factors

How much one can borrow for a home purchase depends on the client's income, previous financial behavior, and existing obligations. The bank evaluates these factors together to provide a realistic assessment of a person's ability to repay the loan throughout the agreed period.

In addition to income, the number of applicants, dependents, and other financial obligations affect the loan amount. "Monthly loan obligations can constitute a maximum of half of a person's income, but for many it is safer to keep the loan burden at a lower level. In practice, based on our clients, nearly three-quarters of borrowers maintain loan payments in the range of 20–40% of their income," said Pärgma.

Up to 10,000 euros more home loan with average salary

"At Estonia's average salary of approximately 2,100 euros gross income, the increase in net income resulting from the loss of the tax-free allowance is already clearly noticeable. A person earning average salary or more now receives around 150 euros more on payday than before. If last year approximately 1,580 euros was deposited into a bank account, this year that amount is around 1,730 euros," she explained. 

Greater net income also increases the maximum loan amount. For example, if last year the maximum home loan amount for an applicant with average salary and no dependents was approximately 104,000 euros, this year it has risen to around 114,000 euros.

Since the final purchase price of a home is formed by the combination of loan amount and own financing, this means the opportunity to purchase a home costing approximately 126,000–134,000 euros. With a smaller own financing contribution of 10% (with EIS guarantee), the down payment in this case would be around 12,000 euros, while with the standard 15% own financing, it would be around 20,000 euros.

"For families too, the change is noticeable: for two applicants earning average salary with two dependents, the maximum loan amount has increased by nearly 25,000 euros compared to last year," added Pärgma.

Loan should support quality of life

Anne Pärgma, head of home lending at Swedbank, emphasized that using the maximum loan amount should not be a goal in itself, and from the bank's perspective, a home loan should support a person's quality of life rather than become an excessive burden.

"The bank evaluates borrowing capacity based on previous financial behavior and income, but does not see a person's future plans. If it is known that daily expenses may increase in the coming years, it is worth taking this into account when planning a home purchase. One should borrow exactly as much as needed – and no more," she advised.