OREANDA-NEWS. May 28, 2014. In Estonia, the home loan portfolio has been growing since April 2013, with new loans granted outnumbering existing ones being repaid. In Lithuania, the balance of home loans began to grow last June, whereas in Latvia it keeps declining by about five per cent a year. SEB’s new economic analysis of households in the Baltic States reveals that given the very vigorous growth of the loan portfolios before the economic crisis, the subsequent contraction in the loan volume has remained fairly moderate.

The interest rate on home loans has dropped most in Latvia, where there is also likely more room for the decline to continue.

In Estonia, the home loan portfolio decreased by 11.1 per from December 2008 to March 2013. Given the four-fold growth of the portfolio from 2005 to 2008, the decrease has been relatively modest. In Lithuania, the home loan balance decreased by a total of 15.6 per cent, having grown six-fold previously. In Latvia, the entire volume of home loans has decreased by 34 per cent since November 2008, whereas the portfolio grew almost five-fold from 2005 to 2008. As a result, the home loan portfolio grew most in Lithuania, whereas the setback has been greatest in Latvia, with the volume of loans continuing to decrease there at the moment.

Loan growth is being driven by home loans. In Estonia, home loans granted in the first and second halves of 2013 outnumbered those during the same periods in 2012 by 20 and 22 per cent, respectively.  According to the Association of Lithuanian Banks, the home loan turnover in Lithuania in 2013 was as much as 40 per cent higher than in 2012. New sales of home loans in Latvia in 2013 topped 2012 levels by 26 per cent. The volume of new home loans also includes loans refinanced from other banks; as a result, added new loans do not necessarily mean growth in the loan portfolio.

“Since decisions on purchasing a new home or renovating a home were postponed during and after the economic crisis, interest among families of improving their living conditions may be expected to grow.  That said, nobody is in a hurry when making long-term loan decisions: purchases of homes are being financed with loans to a much smaller degree than before the crisis. The same may be observed in the financing of consumption. Currently, families prefer to save for consumption spending, and payment plan instalments are preferred to consumer loans when it comes to durable goods. Concerning the outlook for their income, families are quite conservative; there is conviction that income in the future is never guaranteed and that it is not sensible to use it up in advance by taking out a loan. Because of that, the consumer loan portfolios may be expected to keep decreasing in all three Baltic States in 2014,” commented Triin Messimas, Development Manager of Private Loans at SEB.

Due to a drop in EURIBOR, interest rates on home loans have dropped significantly since 2009. 2012 saw the biggest drop. The introduction of the euro in Latvia in 2014 provides grounds to expect interest rates on home loans there to keep declining. However, due to a relatively high proportion of problem loans and higher loan risks, there is reason to believe that interest rates in Latvia will remain higher compared those in the other Baltic States.

“Various studies show that families who have home loans with variable interest rates are used to the current low interest levels, as a result of which any interest hikes and, thereby, any growth in credit costs may cause an unpleasant surprise. On the other hand, families are currently more conservative when taking out loans and weigh their loan capacity thoroughly, which leads one to believe that in the event of rising interest rates they will manage to meet their loan obligations without a problem,” Triin Messimas added.