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Karin Ossipova, Head of Mortgage Lending at Coop Pank, uses a home loan as an example of the total costs that must be calculated before the decision to take a loan is made.

The costs related to a home loan divide in one-off expenses related to the payout of the loan and regular expenses that must be paid once a month or once a year depending on the selected payment schedule.

We used a two-room flat in a 1970s building in Mustamäe, which costs 80,000 euros, as an example. The borrower has 8,000 euros for self-financing. The bank can finance 90% of the price of the flat, i.e. 72,000 euros, as the loan applicant belongs to the KredEx target group, which means that the KredEx home loan guarantee in the amount of 4,000 euros can be included.

One-off costs – approximately 1,170 euros

• Expert valuation of property – various real estate agencies provide the service of property valuation and the selected service provider must be accepted by the loan applicant’s bank. An expert valuation of a flat costs approximately 150-200 euros, but it’s more expensive in the case of houses and plots of land.
• Notary fee and state fee – the notary fee for the purchase and sales transaction and the establishment of the mortgage and the amount of the state fee are stipulated in the Notary Fees Act. The fee depends on the price of the property and the amounts of the loan and the mortgage. The approximate cost is 500-600 euros.
• Loan agreement fee up to 1% of the loan amount – although the maximum fee of a home loan agreement is 1%, the bank may reduce it. The amount of a 0.5% agreement fee would be 400 euros.
• Fee for a KredEx guarantee, which is 3% of the guarantee amount – this is a one-off fee paid when the agreement is signed. In the case of the sample transaction, the guarantee fee would be 120 euros.

Regular costs – approximately 323 euros per month

• Monthly loan payment – in the case of the most common annuity schedule, where all loan payments are equal, the monthly loan payment with interest would be approximately 300 euros.
• Home insurance – in the case of property financed by the bank, the bank demands insurance of the home, which protects the property used as collateral and the interests of the borrower and the financier. In the case of a two-room flat in an older building, the average cost of home insurance is 35-45 euros per year (3-4 euros per month).
• Loan insurance – the bank that finances the purchase of property often expects the borrower to also take out loan insurance to ensure that the loan will be repaid in the case of the borrower’s health issues, loss of capacity for work, or death. The monthly loan insurance premium depends primarily on the borrower’s age, the nature of their work, and the sum insured. For example, in the case of a 30-year old woman who takes out loan insurance to the extent of the entire loan amount for 30 years, the monthly insurance premium is approximately 20 euros.

Interest rate

• Base interest of the loan – the interest rate of most home loans consists of the interest margin specified in the loan agreement and the Euribor, the average interest rate of European banks. The interest margin is fixed in the loan agreement and doesn’t change over time. The average interest margin of a home loan issued in Estonia was 2.58 percent in January 2020.
• Euribor – the loan is usually tied to the average Euribor of six months and it changes over time. The Euribor has been negative for many years (the 6-month Euribor effective at present is -0.4%) and is equalised with zero in home loan agreements. This is good for the borrower, but you must be sure that you can still pay the monthly loan payments if the Euribor goes up, e.g. to 5%, which is what happened in 2008.

Annual percentage rate (APR) indicates the total costs related to the loan per year. The interest rate, agreement fees and other fees that the borrower is obliged to pay according to the agreement are taken into account when the APR is calculated. The APR is shown as a percentage, but it doesn’t indicate all of the costs related to the loan. For example, if the insurance premiums are not part of the loan schedule, they are not taken into account in the APR. In the case of our example, the monthly loan insurance premium of 20 euros increases the APR by as much as 0.4 percentage points.

I advise you to calculate the total amount of all the costs related to the loan when you weigh the loan offers available to you. A sample payment schedule, which you can obtain through the loan calculator on the bank’s website, helps you calculate the interest payments. A loan administrator helps you calculate all of the costs.