Low Competition – Higher Profits

Loan refinancing expert Mindaugas Girjotas claims that the reason Lithuanians overpay banks for housing loans is insufficient competition in the market.

"Lithuania's housing loan market lacks competition because we essentially have a dominant oligopolistic situation where three banks hold over 80-90 percent of the market, and all other banks' attempts to capture a larger market share don't yield tangible results," notes M. Girjotas, head of independent loan intermediary "refiGO".

According to him, this is greatly influenced by the habit established in Lithuania of residents having their "home" bank – people are accustomed to using one bank's services and believe that being a loyal customer is an advantage when it comes to loans as well.

"Residents think that by using one bank's services for a long time and having more of its products, they can expect a better price for a loan.

However, this is not true – each bank evaluates each situation and risk individually, based both on the Bank of Lithuania's responsible lending provisions and internal bank rules, and loyalty or the number of bank services held are not essential risk assessment factors.

Usually, people wanting to get the best housing loan offer should survey as many banks as possible, yet they often stay with 'their' bank and don't look into alternatives either when taking out a loan or in the future when they could take advantage of refinancing opportunities," states the head of "refiGO".

Banks Fear Credit Intermediaries

M. Girjotas notes that credit intermediaries would help increase bank competition in the housing loan sector – this is shown by successful experience in other countries. However, in Lithuania, loan intermediaries are only taking their first steps, and residents are not yet accustomed to using their services.

"Independent credit intermediaries still find it difficult to operate. Not only because this is new to people, but also because banks are not inclined to cooperate with them, and the reason is simple – they fear greater competition.

The situation could be helped by lawmakers and market regulator the Bank of Lithuania by providing stronger support to credit intermediaries. If all banks cooperated with credit intermediaries, this would allow the latter to give their clients a picture of the entire market – to analyze all possible housing loan offers," claims the head of "refiGO".

According to him, to get the best housing loan offer, one should contact all banks, but it's difficult for residents to do this themselves – it requires time and negotiation expertise, while independent credit intermediaries, having experience, do this professionally.

"A person needs to fill out one application, and the credit intermediary negotiates with various banks and, having compared the offered conditions, can present the client with the best offer," notes M. Girjotas.

Lithuania Has Some of the Highest Bank Margins in the Eurozone

Lithuania remains among countries where bank margins – especially for housing loans – are among the highest in the eurozone. The lowest average margins are in Spain (0.5 percent), Slovenia (0.69 percent), Finland (0.75 percent). The eurozone average is 0.92 percent.

According to the loan expert, high margins mean that residents pay more for loans – this is especially relevant in the case of housing credits. Even a 0.5–1 percent margin difference over a 20–30 year period can result in additional tens of thousands of euros in interest.

"This is a slow and unnoticed financial drain from household pockets into major banks' profits. And most people don't even think that they could pay less," notes M. Girjotas.

Reminds to Check Prices Regularly

He reminds that those with housing loans should check possible housing loan prices once a year, and try to refinance at least once every two years. Unfortunately, last year only less than one in ten (8 percent) housing loan holders did this. According to Bank of Lithuania data, currently about 360 thousand residents or families in Lithuania have at least one housing loan.

The Bank of Lithuania also announced in January this year that for consumers who renegotiated terms, the margin decreased by an average of 0.4 percentage points, which is a significant amount. "With a 100 thousand euro loan, this would amount to 30 euros per month or almost 9 thousand euros over the remaining loan period. It should also be kept in mind that throughout the entire loan payment period, one can regularly try to refinance the loan and save even more," notes the head of "refiGO".