Transferring a home loan to another bank could be made simpler and cheaper



Eesti Pank and Finantsinspektsioon have put together a series of proposals that would make it quicker, simpler and cheaper for people to transfer their housing loan from one bank to another. Implementing the proposals would improve the functioning of the lending market and encourage competition in banking, but it would need some changes to the law.

The proposals stem from the recent analysis by Eesti Pank of competition in banking in Estonia, which Finantsinspektsioon helped to produce. Transferring a contract from one bank to another could be done more quickly and more efficiently above all if the fee for terminating a loan contract early was removed or substantially reduced. Such a fee can generally only be avoided at present if the early repayment of the housing loan is planned three months in advance, which makes it very troublesome to refinance a loan. The proposal to change this is the one that would have the most financial impact. The value of the real estate used as collateral for the loan from the second bank when a housing loan is transferred could be assessed by the bank itself rather than by a real estate appraiser, and the requirement to have the transfer notarised could also be lifted. A similar solution is used in Finland and Sweden.

The second group of proposals calls for there to be a larger range of options when the loan price is set. The typical loan from the majority of banks at the moment is based on the six-month Euribor, but one proposal is to require the banks to offer clients loans based on both longer and shorter Euribors and also loans with interest rates fixed for several years.

If somebody has an existing housing loan of 100,000 euros, the cost of transferring it to another bank could currently be as much as 3000 euros. The proposals from the central bank and the financial supervision authority would reduce the cost of transferring the loan a great deal and make the transfer quicker and easier.

“Competition increased in the market for mobile communications in Estonia when it was made easier for people to change their mobile network operator, and we could move in the same direction with banking. It would then be less difficult and less expensive for people to move their loans to a different bank, and the banks would have more interest in offering their customers better terms. The banks should not only compete for new clients, but should also compete to hold onto their existing clients. The example of Finland shows that even quite a small loan market can be made to work much better like this”, said Governor of Eesti Pank Madis Müller.

Member of the Finantsinspektsioon management board Siim Tammer said that Finantsinspektsioon supports initiatives that make it easier to refinance housing loans. “We particularly note the valuation of properties. The property valuation service is a notable cost in refinancing a housing loan, and the banks should be able to consider a solution that does not force their clients to go to a real estate appraiser in every case. The banks could be flexible in such cases and do the valuation themselves, which would make refinancing of housing loans cheaper”. He added that several other proposals would need changes to the law if they were to be introduced. “Initial discussions have already been held with the Ministry of Justice and the Ministry of Finance about lifting the notary fees and state fee for refinancing housing loans. Everybody understands the current situation and that changes would need a broader public discussion about whether the role of notaries in refinancing housing loans should be reduced or not”.

As well as working with the Ministries of Justice and Finance, Eesti Pank and Finantsinspektsioon are planning to discuss the proposals in greater depth with the banks and the Estonian Banking Association to look for the best compromise possible between the costs of financing the economy and financial stability.

Analysis of competition in banking in Estonia

Eesti Pank noted in its recent analysis that competition between the banks has not deteriorated in recent years, but the profitability and the cost of loans at the banks in Estonia have in general been higher than those in other advanced economies, which suggests that competition is weaker in Estonia.

The analysis of competition in banking by Eesti Pank assessed a range of factors that may affect competition. Some of those factors cannot be altered, such as the small size of the Estonian market. Although the profits of the banking sector are large relative to those of other sectors of the Estonian economy, the potential client base is still relatively small and so does not tempt large foreign banks to enter the Estonian market. It is very probable that there will only be a few large banks dominating the Estonian market in the future as well.

Although the number of banks is small, access to loans in Estonia is relatively good, which has been shown by data from surveys and by lending growing notably faster than the average in the euro area. Access to funding is more important for the sustainable development of the economy than loans having the lowest possible price. The supply of loans would however probably still be sustainable with lower levels of profitability, and a lower lending price would support the competitiveness of the non-financial sector.

It is important for the sustainable development of the Estonian economy that the banks that circulate the lifeblood of the economy are themselves in good health. It is consequently important in the price of loans offered to people and companies that the margins on the loans be sustainable and profitability sufficient that the banks can cope with loan losses, raise additional capital, and continue to lend even during difficult times.

For further information:
Viljar Rääsk
Head of Communications
Eesti Pank
5275 055
Email: [email protected]
Press enquiries: [email protected]

Eva Vahur
Head of Communications at Finantsinspektsioon
Tel 53300619
[email protected]
Press enquiries: [email protected]