Five questions to ask yourself before taking out your first home loan

Anette Saiko is a Youth Segment home loan manager at LHV. For the past three years, she has been helping young people make one of the most important financial decisions of their lives – taking out their first home loan. On a day-to-day basis, she advises clients on home loan terms and conditions, borrowing capacity, personal contributions and preparing to buy a home, observing firsthand the questions and concerns that young people face most frequently. We’ve put together five questions which, according to Anette, you should definitely ask yourself before applying for a home loan and starting your hunt for a home.

Question 1. What does the bank actually look at in my bank account?

In short, when assessing the terms of a home loan, the bank primarily looks at income stability, financial discipline, and saving habits.

This is one of the most common questions young people ask when considering a home loan. People also often look into what the actual terms and conditions are, and what the bank focuses on most when assessing a loan application.

When applying for a home loan, income is certainly important, but how a person manages their money on a day-to-day basis is just as important. ‘A bank statement gives the bank a fairly good idea of how sustainable a person’s current lifestyle is and how well they are likely to be able to manage their loan repayments in the future,’ explains Anette Saiko.

Factors most often affecting borrowing capacity include unstable income (for example, a probationary period or a brief employment history), as well as hire purchase agreements, credit cards, and other loan commitments. Attention is also paid to whether there is any money left over at the end of the month or whether the entire income is regularly spent. The ability to save is also important, as regularly setting aside money shows that a person is able to plan their expenses and is prepared to cope with unexpected events. Conversely, a lack of savings may indicate that even minor changes in income or expenditure could cause difficulties in the future.

When applying for a home loan, many young people focus primarily on how much they earn. In fact, your overall financial behaviour is important when it comes to meeting the terms and conditions of a home loan. The bank wants to see that the person is able to manage their day-to-day financial obligations and will be capable of making home loan payments consistently in the future.

‘If you’re planning on purchasing a home in the next few years, it’s worth demonstrating stable financial behaviour for at least 3–6 months. This means that you avoid unnecessary debt, keep your expenses under control, and steadily build up your savings. Good financial behaviour doesn’t happen overnight, but is the result of habits,’ she says.

Anette also recommends ensuring that your income is official and transparent. For example, when it comes to casual work, it is worth giving preference to employers who draw up a contract and pay the necessary taxes on your earnings. This gives the bank confidence in the sustainability of the income and helps the young person demonstrate their ability to pay later on.

Before starting to look for a home, young people should also research the terms and conditions of various home loans and use a home loan calculator to help them assess the loan amount and monthly repayment that would be realistic given their income. Although the calculator provides an initial guide, the bank always makes the final decision based on the individual’s actual financial situation.

Question 2. What can I actually afford?

In short: before buying a home, it’s worth using a home loan calculator and focusing primarily on a monthly repayment you can afford, rather than the maximum possible loan amount. In addition to your current income, you should also take into account future changes, interest rates, and unexpected expenses.

'I’d suggest you start by thinking about how much you can comfortably afford to pay each month. A home shouldn’t mean that the rest of your life has to be built around a single home loan payment. ‘There needs to be room in the budget for savings, hobbies, travel and unexpected expenses,’ says Anette. As a general rule, your total monthly financial commitments should not exceed half of your net income.

Anette emphasises that the bank deliberately takes a conservative approach to assessing creditworthiness. This means that potential interest rate increases and changes in the economic environment are also taken into account. For this reason, the maximum possible loan amount may not always be the most sensible choice.

‘When buying a home, it’s worth leaving yourself some breathing space.’ If a person borrows up to their maximum capacity, even a small unexpected expense or a reduction in income can place significant strain on everyday life. ‘Your home should provide a sense of security, not create constant pressure,’ she explains.

Question 3. Is it better to buy a home on your own or with someone else?

In short: a joint home loan and buying a home together can increase your borrowing capacity and help you get your first home sooner, but before taking on a joint commitment, it is worth considering the responsibilities, potential risks, and your long-term plans.

For many young people, when buying their first home, the question arises as to whether to take out a home loan on their own or jointly with a partner. Buying a home as a couple usually helps to increase your borrowing capacity, as the income of both people is taken into account. At the same time, it is not merely a financial decision.

‘When buying a home together, it is worth thinking not only about what it offers today, but also about the responsibilities that come with it in the future.’ ‘Both borrowers are fully liable for the loan, and this obligation does not disappear even if life takes an unexpected turn,’ explains Anette.

For this reason, it is worth discussing the more complex topics before taking out a joint loan, including how monthly expenses will be shared, what will happen to the home if one person’s income decreases, and how matters will be handled if the couple decides to part ways in the future.

If taking on a joint commitment with your partner still feels like too big a step, LHV offers young people the option of including a parent in the loan application. Such a solution may be helpful in situations where a young person’s income or own funds do not yet allow them to secure a home loan of the desired amount.

'It doesn’t have to be a lifelong solution. If the young person’s income increases over time and the outstanding loan balance decreases, it is possible to release the parent from their loan obligation at a later date. ‘This allows young people to take their first step into the real estate market earlier, whilst gradually moving towards taking full responsibility for themselves,’ says Anette.

Question 4. Is it worth making compromises when buying your first home?

In brief: Your first home doesn’t have to be perfect. It is often most sensible to choose an affordable starter home, where the deposit and monthly home loan payments fit comfortably within your budget and which helps you take your first step into the real estate market.

'You often see a wide variety of homes on real estate websites, and it’s only natural to want to find the perfect one straight away. ‘In fact, when it comes to your first home, it often makes sense to think about which solution is affordable today and will support your next steps,’ says Anette.

For young people, the biggest challenge is often not securing a home loan, but saving up the necessary deposit. For this reason, when buying your first home, you often have to make conscious compromises regarding its location, size, or condition. Although an EIS home loan guarantee can help reduce the required deposit on a home loan, it is worth bearing in mind that, in addition to your own funds, you will also need to set aside money for notary fees, the valuation report, and furnishing your home.

Compromises are most often made regarding location, size, or the condition of the home. Sometimes this means a slightly smaller flat; sometimes it means a home in an area that wasn’t initially planned to be considered. It is important to strike a balance between one’s wishes and one’s possibilities.

According to Anette, when buying your first home, it’s worth looking a little further ahead than just the next couple of years. A young person’s career, income, and living arrangements can change rapidly over time, and their expectations of a home often change along with them.

‘Your first home doesn’t have to be your final destination. This is often the first step into the real estate market – a so-called “starter home” – which helps people make the transition from tenant to owner and lay a stronger foundation for future decisions,’ she explains.

That is precisely why it is not worth waiting for the perfect moment or the perfect home. Often, the most important thing is to find a solution that is feasible today, leaves sufficient breathing space in the budget and, at the same time, enables one to move towards their goals.

Question 5. How should one prepare to buy their first home?

In brief: Bear in mind the additional costs involved in buying a home, dare to dream big, and visit the bank for advice sooner rather than later.

‘People often focus solely on the price of the flat and their own contribution. In fact, you also need to take into account notary fees, the valuation report, and any potential repairs and furnishing costs. When you buy your very first own home, you’ll soon realise that, as well as a sofa and a bed, you’ll also need pots and pans, bed linens, a hoover, cleaning products and dozens of other little things, which can all add up to quite a large sum,’ says Anette.

However, preparation does not just mean doing calculations and drawing up a budget.

‘You have to dream, too. In my view, great goals always stem from having the courage to imagine them for yourself in the first place. Dreams provide direction, but it is those who take small steps towards them every day who reach their goals.’

And once the initial preparations have been made, there’s no point in waiting for the perfect moment.

‘Many young people think that it’s only worth going to the bank once they’ve chosen a flat. In fact, I’d recommend seeking advice much earlier. This will give you a better understanding of your options and enable you to take the next steps with greater awareness.’

If you’d like to explore your options in more detail or discuss the terms of a home loan, including your own contribution and the potential loan amount, please book an appointment with Anette by emailing her at anettes@lhv.ee.