Loan payments may rise after expected spring rate hike

Loan payments in Estonia could increase following an expected interest-rate rise next spring, ERR reports. The European Central Bank raised its key interest rates on Thursday, while financial markets expect further increases by the end of this year and next spring.

Markets currently expect euro area key rates to reach about 2.8 percent by the end of the year and 3.2 percent next spring, said Rain Leesi, head of investments at Avaron. The six-month Euribor, which affects loan payments in Estonia, is already around 2.8 percent.

Leesi said this means the next rate increase has largely been priced into the six-month Euribor, so loan payments should not rise immediately. However, Euribor rates could increase further over a longer period. The rate for fixing Euribor for five years is currently about 3.5 percent, he said.

Ülo Kaasik, president of Eesti Pank and a member of the European Central Bank’s Governing Council, said future rate decisions would depend on global developments, energy prices and inflationary pressures. He said the risks were currently greater, particularly because of geopolitical developments that could change direction at any time.

Most Estonian home loan agreements use a floating Euribor rate, meaning that increases are directly reflected in monthly payments. If the six-month Euribor rises by 0.5 percentage points, a borrower with a remaining loan balance of 100,000 euros would pay about 30 euros more per month, while the increase would be about 45 euros for a 150,000-euro balance, said Sille Hallang, head of private banking at SEB.

Higher Euribor rates have not yet reduced demand for home loans. Hallang said SEB’s volume of new home loans had increased by more than 10 percent year on year.