Most purchases of homes are financed by bank loans. Different banks offer different terms based on the client's customership and existing savings. The expenses of living in your own house or apartment consist of residence charges (charges for financial costs and maintenance fees), the consumption charges for utilities (e.g. electricity and water) and the interest payments and repayments of your personal housing loan.
Before commencing loan negotiations, you should estimate how much you can afford to pay for living costs per month. Your bank will later make more detailed calculations with you. Your income, spending, life situation and future plans all affect your ability to repay the loan. Your ability to repay the loan, in turn, affects the availability, size and repayment period of the loan. Banks will charge interest and fees at various rates for the loans they grant.
- For a loan with a fixed amortization schedule the outstanding principal of the loan is amortized a fixed amount with each payment. However, the proportion of interest in the payments made decreases with each payment, assuming that interest rates do not increase at the same time. The costs of servicing the loan are high at first and gradually get smaller as the end of the loan period approaches.
- With annuity-based amortization the sum of the repayment of principal and the interest payment is the same throughout the loan period. At first, the proportion of principal repayment is smaller and the proportion of interest is larger, but as the amount of outstanding principal decreases over time, these proportions are reversed.
Some banks also offer a constant payment loan, with equal payments throughout the loan period. In this arrangement, the length of the loan period itself will be adjusted as interest rates fluctuate, but the size of the payments stays the same. The number of payments per year and the size of the payments both affect the total cost of servicing the loan. It is also possible to agree not to repay any of the principal during the first year, for example, while servicing only the interest on the loan. Any years during which the principal is not repaid do, however, translate to a longer loan period and higher total costs of servicing the loan. Having an arrangement where there are years during which the principal is not repaid generally involves a higher interest rate as well.
Interest rates vary from one bank to the next
The bank ties the interest rate of the housing loan to a reference rate. New housing loans usually use the banks' own market-based reference rates – known as prime rates – or euribor interest rates. Banks determine the level of their prime rates themselves. The euribor rates for different maturities are quoted on the EU interbank market. As a rule, the 12-month euribor rate, for example, stays constant for one year at a time. The borrower and the bank may also agree to make the interest rate on the loan constant, keeping it at the same level throughout the loan period. It can also be agreed that part of the loan is tied to a fluctuating interest rate while a constant rate is applied to the other part.
The total interest rate payable by the borrower is the reference rate plus the margin determined by the bank on a customer-specific basis. If consumers who are buying homes know the actual annual interest rates todellisenvuosikoron that include all the costs of servicing a loan, they can compare the costs of loans between various financial institutions.
Consumers who purchase homes are also liable to pay transfer tax
In addition to the price of the house or apartment, the buyer must pay transfer tax. The rate is 2.0% of the purchase value for apartments (shares in housing companies) and 4% for single-family houses and other properties. First-time home buyers are exempted from the transfer tax provided that the home is used as the buyer's own permanent residence and the buyer has not held at least 50% of an owned house or apartment since 1989. A first-time home buyer must also be between 18 and 39 years of age to qualify for the exemption.
Standard European Consumer Credit Information makes it easier to compare credits
The lender must provide all essential details of the consumer credit agreement and consumer rights well in advance of the conclusion of the credit agreement. The details must be supplied on a permanently storable copy (in writing or electronically) using the Standard European Consumer Credit Information form so that the consumer can save or print out the information.
The loan agreement
The terms and conditions of the loan agreement give the type of loan in question, payment obligations and the other obligations of the parties concerned. You may repay the balance in whole or in part before due date even if this was not mentioned in the loan agreement. Carefully examine the loan terms and conditions and retain them to avoid any misunderstandings.
Check your rights and duties under the loan agreement, such as the consequences of any payment arrears, the situations where the lender can cancel the loan and the consequences of a cancellation.
Changes in interest rate
The lender may change the effective interest in accordance with the reference rate specified in the agreement if this is stated in the agreement. The lender must notify the borrower of changes in the interest rate on a permanently storable copy (such as a letter) before the changes take effect or on dates agreed between the parties. The lender must also give the amount of the individual instalments payable after the changes and notify the borrower of any changes in payment dates or the number of instalments.
Right to repay a loan before due date
You have the right to repay your loan before due date, in whole or in part. If you repay a loan early in whole or in part, the loan costs directed at the remaining loan period must be deducted from the outstanding claims of the lender. However, the lender has the right to collect the actual costs arising from the measures connected with the establishment of the loan in question that are specified in the loan agreement.
Right for compensation in housing loans
The lender may charge a compensation for early repayment of a housing loan if the loan amounts to more than EUR 20,000 and has a fixed interest or the period for determining the reference rate is at least three years. As maximum compensation, the lender may charge the loss resulting from the lowering of the interest rate for the remaining fixed-term loan period or the period determining the reference rate. For more information on how to calculate the loss, contact the Financial Supervisory Authority.