A little-known option: a young person can take out their first home loan with the help of their parents

LHV statistics show that almost 20 per cent of borrowers are young people under the age of 26, who have taken out a loan either alone or with a co-applicant. It is becoming increasingly popular to include one parent as an additional applicant, which increases the likelihood of getting a loan.

Young people generally start thinking about buying their own home after university, when they have settled into their first job and are building up considerable work experience and confidence in the future. However, young people face two major challenges: raising the required amount of self-financing and generally high property prices, which leave them with a feeling of insecurity.

Prices for one and two bedroom apartments in Tallinn’s ‘mäe’ districts (for example, Mustamäe) average between EUR 100,000–130,000, while in other major cities they are somewhat lower. The amount of self-financing for such an apartment is between EUR 20,000–26,000, which is a major challenge for many young people. One option is to use the KredEx surety, which reduces the amount required, and try to save the rest over the years or borrow from one’s parents.

Catlin Vatsel, Head of the Private Financing at LHV, says that the starting point for young people to begin an independent life is definitely a challenge, but LHV’s experience shows that young people are resourceful. ‘Compared to, for example, a decade ago, we can see that in the Internet age, many young people have found ways to earn extra money while going to school or in addition to their existing jobs. For example, we have had clients who have gone to America to sell books and raised the money they needed, as well as those who have set up their own online shop or provided specialised expertise in an online environment,’ said Vatsel, who remains positive about opportunities for young people, adding that young people also want to be sure of their own financial capability before making a big commitment. ‘Many young people have also taken the opportunity to save money while still living with their parents, when costs are significantly lower,’ Vatsel adds.

In addition to the KredEx surety, young people can also take out their first home loan with the help of a parent, giving them more financial flexibility and increasing the likelihood of getting the desired amount. ‘When granting a loan, the bank takes into account the client’s borrowing capacity with a +2% higher interest rate, and it often happens that a young person’s income is not enough to buy the most suitable home. In this case, a parent can come to the rescue and become a co-applicant,’ says Vatsel, introducing one little-known way to get a home loan.

However, such an option assumes that the young person is already able to pay most of the loan payments and that with their job and education they have the potential to fully service the loan in about five years. It should also be taken into account that the parent assumes exactly the same contractual obligations as the loan applicant and the loan period is calculated according to the parent’s age,’ said Vatsel, explaining the flexible options, adding that later, when the young person is more financially independent and able to service the loan in full, the parent can be released from the obligation of the additional applicant and the loan period can be extended.

Young people always have the advantage of their age, as they can easily take advantage of the opportunity to borrow for the maximum period, with the minimum monthly payment. ‘However, financial literacy is much more than just taking out a loan and servicing it. It is also important to save and accumulate for the harder times that can hit anyone. Ten per cent could be the minimum amount that would go into a separate account on payday or be invested to cover unexpected expenses in the future,’ notes Vatsel, saying that every bank looks positively on clients who have the capacity and habit of setting aside a little money every month.

Taking out one’s first home loan is a big step, but with the right planning and strategy, it is an achievable goal.