In April, Eesti Pank is going to amend the requirements that regulate the calculations made by commercial banks to assess a borrower’s maximum borrowing capacity for a new housing loan. The change in the calculations means that despite the high interest rates prevailing at the moment, a loan applicant’s maximum borrowing capacity will be the same as it was before the European Central Bank’s interest rate hikes. The debt service-to-income (DSTI) ratio limit will stay the same – the sum of all the loan and leasing payments of a borrower may not exceed 50% of their net income.

As the main change, the central bank amended the requirement around the interest rate used by the commercial banks to assess a borrower’s maximum borrowing capacity. At the moment, the banks have to use either the interest rate in the loan contract plus two percentage points, or an annual rate of 6%, whichever is higher. The two additional percentage points in the formula will no longer be applied as of April 1 and the calculations have to apply either the interest rate in the loan contract, or an annual rate of 6%, whichever is higher.

The quick base rate hikes over the past year and a half have already had a tightening effect on the credit environment. The potential loan volume has also been limited by the requirement to add two percentage points to the interest rate when calculating monthly repayments. In November 2023, for example, when the banks gave out housing loans at an average interest rate of 5.7%, they were required to assess the borrowers’ capacity at an average interest rate of 7.7%.

“The main aim of amending the interest calculations is to make sure that people's borrowing capacity would not be limited further by the additional two percentage points, as the market interest rates are already high,” said Head of the Financial Stability Department Jaak Tõrs. Tõrs said that if loan growth picks up considerably over the next few years and a loan boom starts looming, meaning that both people and banks start taking risks that are too great, Eesti Pank will stand ready to establish more stringent rules on issuing housing loans.

From a macroprudential perspective, Eesti Pank deems it reasonable and sufficient to set the DSTI limit at the highest average loan market interest rate seen in the interest rate cycle, which is 6%. But when they are assessing the credit capacity of a single borrower, the banks still have to abide by Finantsinspektsioon’s guidelines that require performing sensitivity analyses where the potential future rise in interest rates is taken into account.

Eesti Pank also specified DSTI requirement calculations in case of special repayment schedules. As these loan contracts allow the principal amount of a housing loan to be repaid in later years, the borrower is able to take out a bigger loan in relation to their income. The central bank’s requirements state that if the housing loan is not repaid as annuity or as equal principal payments, the sum of the monthly principal and interest payments of such a loan has to be calculated as the average over the entire loan contract period. The goal is to ensure that the loan burden does not become excessive even in case of special schedules.

As of 2015, Eesti Pank established minimum requirements for issuing housing loans to which commercial banks operating in Estonia had to adhere. The requirements were intended to make sure that the banks and borrowers as a whole would not take risks that are too high, thus ensuring the sustainable functioning of the Estonian economy overall. Read more about the requirements for housing loans established by the central bank on the Eesti Pank website.

For further information:
Viljar Rääsk
Head of Communications
Eesti Pank
Tel: 5275 055