Linas Jegelevičius
Just recently, Jonė, a dweller of Vilnius with the salary of 1200 euros, would have paid a 450-euro mortgage for her nearly 40-square-meter apartment in a sleepy district of the Lithuanian capital. But with Euribor skyrocketing, her financial liability has increased by a whopping 150 euros, to 600 euros.
“I am very jittery about the increase. I am looking for an extra job in the evenings or on weekends to feel cosier with the obligation,” she told BNN.
Lukas, who has bought a 36-square-meter apartment in a renovated house in Antakalnis, the capital’s serene and prestigious district, depending on 100 000 euro loan has done just that, eking out a couple hundred of euros by teaching English remotely.
“If Euribor had not risen so dramatically,
my monthly mortgage payment would be around 550 euros and now it stands at 725 euros.
Ouch!” he told BNN.
Meanwhile, Laurynas, a 26-year-old from Vilnius, who is just considering buying an apartment, got excited after the Lithuanian Central Bank (CB) called this week on banks to offer fixed-rate mortgages for at least five years.
“The Bank of Lithuania does not encourage consumers to pick fixed or variable interest rates as consumers need to decide themselves, but consumers must be provided with a real opportunity to choose the most suitable product for them and receive information about the outcome of one or the other choice,” Gediminas Šimkus, chairman of the CB, told reporters on Tuesday.
In Lithuania, 96 percent of mortgages have variable interest rates and 4 percent have fixed interest rates.
According to the central bank, the cost of fixed interest rates in Lithuania is one of the highest in the euro area and exceeded the average by 1 percentage point in 2022.
Variable-rate mortgages are also prevalent in the other Baltic states,
Finland and Sweden.
Meanwhile, fixed interest rates are particularly popular in countries with a large and well-developed financial sectors, such as France and Germany, where more than 85 percent of new loans have fixed rates at least for a certain period of time.
According to the Bank of Lithuania, 98 percent of mortgage holders have their interest rates recalculated every three, six, or 12 months.
After the CB proposed to oblige lenders to propose mortgage holders at least two alternatives – either to choose a home loan with a variable interest rate or a fixed one, economist Aleksandras Izgorodinas hastened to say that choosing the latter would be a big mistake today.
“In doing so, mortgage payers would see the interest rates fixed almost at their peak, which would empty the wallets.
So definitely, currently, fixed mortgage interest rates are not worth,”
he emphasised to delfi.lt
According to him, the European Central Bank (ECB) has not yet completed the rate hike cycle and interest rates are likely to be raised once or twice more, depending on new inflation rates.
“So if this year a person decided to fix the interest for five years, he or she would get the interest rates fixed practically at their peak, which means that, for five years, the person will have to pay very high interest for his loan, which will automatically limit the person’s financial abilities,” he said, adding that, in this case, the banks would be overpaid.
“My prediction is that the ECB will not cut base rates until late autumn, but I think October or November will be the time when the ECB will start to cut rates, but because of the recession it could happen next year….In any case, the end of this year or the beginning of the next, January, will already be the time when interest rates will be reduced. The long-term interest rate in the euro zone would reach 2.2-2.5 percent. This means that they will be noticeably smaller than now, so fixing them now, in my subjective opinion, is not worth it,” the economist underlined.
According to him, in Lithuania, more than 80 percent of all new loans last year were issued at variable interest rates.
“In that respect, Lithuanians are among the leaders in Europe,” he says.
Looking at the distant future, preparing for the next time when inflation rises in the Eurozone, the decision to fix interest rates is of course very logical, he says.
But economist Algirdas Bartkus thinks differently.
“When interest rates are low, everyone runs to get a loan with variable interest rates, because at that time, credit is very cheap. However, it is very naive to think that 20-year interest rates will be low…So the CB’s proposal is quite rational, however, in my opinion, no one will enter into fixed interest rate contracts with this high rate now, although I would recommend it,” he told delfi.lt, adding that
the ECB will not stop raising interest rates anytime soon.
Yet despite the extraordinarily high Euribor, the Lithuanian Central Bank says the majority of loan quality indicators remained positive last year.
According to the CB, the share of non-performing (bad loans) in the business loan portfolio remained virtually unchanged and accounted for 1.48% (€145.8 million) last year, while that in the household loan portfolio contracted by 5.57% and accounted for 0.84% of the total household loan portfolio (€114.8 million), also in 2022.
As a reminder, in early May, the Lithuanian parliament Seimas supported the government’s proposal to introduce a “temporary solidarity contribution” payable by all banks and credit institutions, a levy that is expected to raise over 400 million euros amid soaring banking profits.
There are currently 19 participants in the banking sector: 6 banks hold banking licences, 7 banks have specialised bank licences and 6 banks operate as foreign bank branches.
The bulk of the new levy is to be used for financing the country’s defence sector.
That makes Jonė, the afore-mentioned mortgage holder, disappointed: “I really expected that something will be done to help mortgage owners like me. Alas.”