Housing loans and loan cap
What should I take into account when considering a housing loan?
When considering a housing loan, you must decide
- how much money you need and can afford to borrow
- how big a share of the required amount you can finance yourself
- how fast you can repay the loan
- how often and how large will the repayment instalments be
- what repayment method you prefer
- to which interest rate you wish to tie the loan (fixed rate, reference rate)
- what type of risks you wish to protect yourself from and how.
The term of a loan can nowadays be very long – for example, loans up to 25 years are possible. When considering a loan, you must take into account the relationship of the loan principal to your own loan servicing ability, your assets and particularly the value of the house/apartment to be financed.
To secure a housing loan, you might need collateral, which may be, for example, the house/apartment to be purchased plus other collateral, if necessary.
What is a loan cap?
The amount of a housing loan may amount to a maximum of 90% of the current value of the collateral posted at the time of loan approval (maximum loan-to-value ratio or loan cap). Consequently, in accordance with the loan cap regulation, when buying your house/apartment you must have at least 10% in own savings or provide a sufficient amount of other collateral. An exception to this is the amount of a loan taken for the purchase of one’s first home, which may be at most 95% of the current value of the collateral posted at the time of loan approval.
Accordingly, the purchase of a house/apartment cannot be financed in full by a loan if the only collateral is the house/apartment to be purchased. Of the house price, 15% (5% for first-time home buyers) must be covered by savings or other collateral.
For the purpose of calculating the maximum amount of a loan, the following forms of collateral are acceptable:
- primary housing pledge (shares in a housing corporation, mortgage deed of real estate, capital value of a right of occupancy agreement, capital value of a partial ownership agreement)
- other housing pledges, including leisure time residences
- deposit collateral
- other real collateral (e.g. equity shares, fund units)
- third party pledges.
In principle, in calculating the loan cap, guarantees granted by a sovereign state or deficiency guarantees granted by an insurance company or another credit institution are not taken into consideration. Personal guarantees are also unacceptable as collateral.
How can I assess my loan servicing ability in the future?
When you apply for a housing loan, the bank must assess your solvency and evaluate whether your income is sufficient for everyday living after loan expenses. It pays to give a realistic picture of your income and expenses so that the bank can evaluate your loan servicing ability accurately.
The following questions are useful in considering your own financial position:
- How much can an interest rate rise affect repayment instalments without it also causing problems in the sufficiency of funds for everyday living? And what if interest rates stay high throughout the term of the loan? In assessing your own loan servicing ability, even during a period when interest rates are low, it is advisable to use an interest rate of at least 6% in the calculations.
- Is an addition to the family being planned, and how would that affect your household finances? What if the mother has to stop working and go on sick leave much earlier than the expected maternity leave?
- How much may the housing service charge increase as a result of housing company repairs?
- How big a supplementary loan can you take, for example for plumbing replacements or repairs or for handling other unexpected expenses?
- How much and for how long can your income decrease due to unemployment or illness? It is advisable to take into account your personal protection against redundancy and, for example, the duration of earnings-related unemployment benefit.
- How much can the house/apartment price decrease and you would still receive enough to repay the housing loan and other possible loans if the house/apartment needs to be sold?
- How long a selling period should you allow for?
- What problems would arise from giving up the house/apartment to become tenants on the rental market?