The Wind of New Changes
Both individuals and legal entities show interest in non-bank mortgage lending opportunities. In interview with the magazine m2 and the portal varianti.lv, a member of the board of JSC West Kredit, Artūrs Silantjevs, shared his vision of the real estate market in Latvia and talked about the changes that have recently taken place in the segment of non-bank mortgage lending.
— JSC West Kredit is one of the most experienced players in non-bank lending – next year, you will celebrate the 30th anniversary of your operations. That is more than a significant age. What is the main difference between non-bank financing and traditional banking financing?
— Our main difference is the relationship with clients, a willingness to engage in dialogue with them. Large banks (it should be noted that in the current Latvian financial sector, two Swedish and two American banks dominate) are becoming increasingly formal each year. Their scale is so vast that many processes within them are automated. In the initial stages, decisions on cooperation are often made not by humans but by so-called artificial intelligence, limited to a “soulless” risk assessment. However, potential borrowers want respectful treatment and lack direct communication. And with each passing year, this is increasingly noticeable.
Another important difference from traditional banks is flexible decision-making. JSC West Kredit tailors all its products to clients. If classic banks are compared to giant ships that slowly react to changes in the financial sea, then we are a small, agile, and quite resilient yacht that responds promptly to any circumstances. Clients highly appreciate both the timeframes in which we make decisions and our quick and clear responses. We avoid unnecessary bureaucracy, analysing each loan applicant individually. The decision-making process for granting a loan at JSC West Kredit takes anywhere from 10 minutes to several days. This is followed by the signing of documents and the mortgage securing process. If we confirm that the loan will be granted, there is no doubt: it will be. Almost 75% of new clients come to us through recommendations. We value such a reputation very highly.
— What purposes do borrowers most frequently request money for? What criteria do you use when granting it?
— Without a doubt, our credit resource costs are higher than those of traditional banks. For business clients, the annual interest rate on a loan ranges from 8 to 12%. For private individuals, we occasionally organize various promotions, within which we offer loans with an annual interest rate of 2.8%. The interest rate largely depends on the collateral for the loan and how stable, in our opinion, the client is.
We allocate money for various purposes for both private persons and legal entities. In all cases, real estate serves as collateral for the loan. In the non-bank financing segment in Latvia, there are about six main players, and JSC West Kredit holds a market share of 70%. The amount of money issued ranges from a few thousand (consumer loans) to several million euros. In the case of large loans, it involves new project construction or the renovation of existing properties.
Over the past year, we have observed a growing interest, particularly from large business clients, in our financial products. This can be explained by the changes occurring in the financial markets. Traditional banks have started to critically assess clients who are involved in investment projects in the real estate sector. They increasingly face loan rejections, which leads them to turn to us in such cases.
Moreover, an increasing number of entrepreneurs have started turning to us, who had previously used crowdfunding platform funds for their project implementation. Three to four years ago, entrepreneurs aggressively promoted themselves, creating real competition, including with JSC West Kredit. However, the “wind” has now turned in our favour again. Some crowdfunding clients are dissatisfied with the terms offered, while others face funding interruptions. The issue with using crowdfunding platforms is that there is always the question of whether the required funds will be available on time. In such cases, much depends on the activity of potential investors and how much they trust the project. It may happen that a developer working on a real estate project may not receive the necessary funds on time and suffer losses. When cooperating with JSC West Kredit, such a scenario is impossible – we have good capitalization. If we decide to allocate 2-3 million euros to a project, this sum is reserved, and the client receives it precisely at the agreed-upon time.
— Are there any changes related to clients who are private persons?
— In the years 2022-2023, a new trend has emerged: more individuals building private houses have started turning to us. Their stories are quite similar: a year or a year and a half ago, a bank had agreed to finance home construction with an estimated value of 130,000-170,000 euros. However, as construction costs increased, the homeowner could no longer fit within the initial estimate, and the bank refused to provide additional funds. People began to explore refinancing options to complete home construction. JSC West Kredit is accommodating in such cases: we are willing to take on higher risks. Importantly, we not only offer financing to the client but, if necessary, provide them with all the necessary specialists who will assist in completing the home construction “turnkey” and hand it over for use. We are interested in the borrower starting to live in their new home – a this increases their asset liquidity.
— Has the increase in Euribor or the European interbank market interest rates affected your clients?
— Not at all! Interest rates for any of our clients have not changed in the past year, and that has been and remains our fundamental position. We provide loans with fixed interest rates without reference to Euribor. Collaborating with us, borrowers clearly understand how much they will have to pay each month after one, two, three, or five years, depending on the term of the mortgage loan. This allows them to plan finances years ahead and live without any surprises. Business people appreciate this: more than half of JSC West Kredit clients are entrepreneurs, and their numbers continue to grow. Our portfolio also steadily increases. The real estate market crisis of 2007-2009 has taught us a lot. Over the past ten years, we have worked responsibly and granted loans, carefully assessing borrowers.
— Does this mean that the quality of your loan portfolio is high, and there is no observed increase in the number of non-performing loans?
— Payment discipline is good; however, there may be occasional debtors, but this phenomenon is not of a dramatic scale. Current clients are creditworthy; they borrow funds for specific needs, carefully consider and weigh their options, understanding clearly how much they can afford to borrow, what obligations they can manage, and what they cannot. It is no longer like it was in 2005-2007 when people borrowed as much as they could get, often without considering how they would repay the debt. Some borrowers now even make advance payments to feel comfortable and avoid living in financial tension.
— What should be done if problems have arisen with the repayment of monthly payments?
— Financially, both we and banks have a range of mechanisms to help borrowers smooth out their situation. For example, it is possible to take a payment holiday, defer principal payments, and only make interest payments on the loan. All issues are solvable. It is important for a debtor to communicate rather than evade creditors. Today, all mortgage companies aim to be socially responsible in their business.
— One of the services offered by JSC West Kredit is loans for participation in real estate auctions. Is this service in demand?
— JSC West Kredit was one of the first in Latvia to start offering money for participation in auctions. The service was in demand because traditional banks did not finance participation in auctions. However, in recent years, this option is less requested as there are fewer auctions. This also indicates good mortgage payer discipline: there are few debtors, and real estate properties do not often end up with bailiffs.
— How do your company analysts assess the current real estate market in Latvia?
— We monitor the real estate market every week because our loan collateral is real estate. I would define the current situation in the Latvian real estate market as stagnation. The word itself has a somewhat negative connotation, but there’s nothing terrible about it: the market is not collapsing, but it's not growing either. Transaction activity has slowed down a bit because traditional banks have significantly increased the costs of credit resources, and they have become more selective in their relations with clients. It can be said that the situation in the Latvian real estate market is neither bad nor good; however, there is still a long way to go for improvement.
— Perhaps it's time for buyers to try dictating their own rules to sellers?
— Only if the deal takes place in the expensive segment. If a residence is offered for 4,000-5,000 euros/m² or more, in this segment, the situation has indeed worsened. Foreign clients have left, but local residents cannot afford such properties in large numbers.
However, in the segment where the buyer from Latvia dominates, no one is particularly inclined to yield. If a standard apartment is listed for sale at 70,000 euros, the owner will not sell it for 55,000 euros offered by a potential buyer. There is no noticeable surge of emotions among sellers in both the primary and secondary markets, and their willingness to reduce prices is not apparent. There is no basis for assuming that the condition of the real estate market in Latvia will worsen tomorrow. It continues to lead its own life, and all processes unfold at their own pace – neither sellers lower prices nor buyers overpay significantly.
I can assume that potential buyers exhibit the following negative characteristic: many of them still do not meet the requirements of financial institutions. This especially applies to regions where the demand for mortgage loans is high, but not everyone can obtain a loan due to insufficient, tax-documented income levels. People often face rejection. This kind of situation is observed both with us and in traditional banks. Both we and banks operate within certain legal norms.
— At the end of our conversation, the question: do you have any restrictions regarding the financing of residential real estate acquisition based on the price for a square meter?
— No, there are none. As I mentioned, each client is assessed individually. In our practice over the past years, there was a case where a credit was granted to an entrepreneur for the acquisition of a luxury apartment with a square meter price of around 10,000 euros. We always support and are flexible if the client is understandable to us, especially if their projected income in the coming years is clear. In such cases, we will always provide financial support. As for entrepreneurs, we will assist them in realizing their business projects, including those related to real estate.
For none of our clients have the interest rates changed in the past year, and it has been and remains our fundamental position. We grant loans at fixed rates without reference to Euribor.
... In the Latvian real estate market, the situation is neither bad nor good – however, for it to be good, there is still a long way to go.
