Borrowers to assume more risk

TALLINN - Estonian Swedbank is changing its system of interest rates on housing loans, which push the risks related to deterioration in the economic environment upon loan customers, reports Postimees. Additionally, the Financial Supervisory Authority fears that people won’t understand the nature of the new system.
Currently things are simple. When taking a home loan, the client gets an interest payment plan that consists of Euribor, which changes every 6 months, and a personal loan margin.

According to the new system, the client can choose to peg the interest rate to the six month Euribor, or to the bank’s own home loan base interest rate. The bank’s own base interest rate consists of the six month Euribor and the gap between interest rates of 7-year bonds corresponding to Estonia’s state rating, and seven-year euro interest rate swap. In both cases, the personal margin is added. At boom times this was around 0.5 percent, now around 2.5 percent. The new rate allegedly includes a lower personal margin.

Advisors to the Postimees story estimated that, in comparison to previous interest rates, the new system will push the risks related to a deteriorating economic environment upon loan customers. Loans extended in 2006 or 2007, at a very low rate, have become expensive for banks now and banks are trying to get out of this disadvantageous situation. One possibility is to make the former favorable interest rate more expensive. At Swedbank, this can happen now, as people want to negotiate a payment holiday or an extra loan.

Another problem concerns informing the customers of the change. On Sept. 6, the Financial Supervisory Authority declared that banks will have to manage to explain to its loan customers how their interest rates will be calculated. Although the authority did not name Swedbank, making the statement right before the new product’s ad campaign is launched leaves no doubt that the authority is concerned about the activities of the state’s largest bank.

After all, a large part of the U.S. housing loan bubble and subsequent crash was due to complex, unclear loan terms offered by banks and money lenders, and an inability of many borrowers and home buyers to understand what they were signing up to.