Finns mortgage interest rates are now clearly rising faster than in most other European countries. A year ago in March, the average loan interest rate for Finns was 0.8 percent, according to the statistics of the Bank of Finland. In March of this year, the interest rate was already 2.64 percent, and it is still rising.
In Germany, for example, the average mortgage interest rate is still less than two percent. Some the experts are have recently updated how quickly the rise in interest rates is now hitting Finns.
It is due to the fact that Finns’ mortgages are typically tied to short reference interest rates, Euribor. Instead, for example in Germany or, for example, Denmark, the mortgage interest rate is often fixed for a long time, even for the entire loan term of tens of years.
Then the bank protects or outsources the interest rate risk of the loan it gives. For example, in Denmark, a bank sells a bond equivalent to a mortgage to the market.
Protection however, it pays. For example, the interest rate of a 20-year fixed-rate loan is usually, on average, clearly higher than the one tied to short-term interest rates.
The difference can be really big. According to the statistics of the European Central Bank, the average mortgage interest rate in Germany has been, on average, about 1.8 percentage points higher than in Finland for the past 20 years. At its largest, the difference has been almost three percentage points in favor of Finland.
In addition to Finland, short reference rates are also popular in Portugal and Italy, among others. In Italy, however, the total interest rates on loans are significantly higher. In Finland, fierce competition and the good condition of the banks have kept margins small.
Let’s calculate what the difference in interest rates means in money: Let’s assume that a consumer would have taken out a mortgage of 200,000 euros with a 20-year repayment period 20 years ago. The amortization method is an annuity, which means that the monthly installments are equal in the beginning.
In Germany, the average interest rate on the loan stock during that time was 4.07 percent, in Finland 2.31 percent. Calculated at the average interest rate, the German would have paid about 94,000 euros in interest and expenses for the loan in addition to the capital, the Finnish about 51,000 euros.
Finnish the person who took out the mortgage would therefore have saved more than 40,000 euros in interest costs. The monthly installment of the loan would have been about 180 euros lower on average in a Finnish loan for the entire loan period.
In a world of very low and falling interest rates, Finns have therefore benefited from really large sums compared to countries with a different type of mortgage culture.
For the sake of simplicity, the calculation has been made with the average interest rate of the entire mortgage portfolio and the average interest rate of 20 years. In reality, the interest rate on the Finnish loan would have varied.
Now however, the situation has turned the other way around. In April, even the last mortgage reference rates jumped to the plus side for those whose interest rate review date fell on April. No one knows for sure how long interest rates will continue to rise.
The increase in loan service costs is not only an individual problem, but also has consequences for the national economy. Even now, the uncertainty caused by the rise in interest rates has held back housing sales and construction. There is less money left for other purchases when the mortgage interest rate rises.
Would it so it would still be useful if loans were tied to fixed interest rates in Finland as well? Working life professor of finance at Aalto University and has had a long career in the London banking world Antti Suhonen presented In the HS opinion piece in March, US-style fixed-rate mortgages to Finland.
Department head of the Financial Supervisory Authority Samu Kurri supports the idea specifically from the point of view of the stability of the national economy.
“When Finland joined the euro, there was a lot of talk about asymmetric risks. Now, Finland’s asymmetric risk is the reference interest rate structure of mortgages. We have a much stronger exposure to rising interest rates than most European countries,” says Kurri.
“
In Sweden, very long loans are taken out. In Denmark, loans are traditionally long, but the interest rate is fixed.
In Kurri’s opinion, it would be good if Finns were at least offered American or Danish-style fixed-rate mortgages, which, however, can be refinanced at no additional cost when interest rates fall.
Longer fixed interest rates have been available in Finland, but their popularity has been weak. They have been more expensive than short-term interest rates, and it has not been possible to get rid of them without a significant additional payment, even if interest rates have fallen.
Size Director responsible for Nordea’s personal customer business Sarah Mella knows well the loan practices of the large Nordic countries, as Nordea operates in all of them. In his opinion, there are other ways to manage interest rate risk than a long fixed interest rate.
“The mortgage market has very different cultures. In Sweden, very long loans are taken out. In Denmark, loans are traditionally long, but the interest rate is fixed. In Finland and Sweden, the most affordable option is usually chosen as the reference rate,” says Mella.
According to Mella, the mortgage system based on Danish bonds is quite complicated.
“It hasn’t really even been considered in other countries. Rather, there has been talk that Denmark would also move more in the direction of other countries,” he says.
In Denmark, the popularity of variable-rate loans has grown recently.
From INTEREST rate risk in addition to a long fixed interest rate, you can protect yourself with an interest rate cap or an interest rate pipe. They also pay, but the customer also benefits directly from the drop in interest rates.
“About a quarter of our loan portfolio in Finland has an interest rate cap. It is even more popular to prepare for rising interest rates by saving and investing alongside the loan payment,” says Mella.
THOUGHT tempts to return to the calculation of the differences between Finnish and German mortgages within 20 years. The recipient of a Finnish loan would therefore have survived with a monthly reduction of about 180 euros for the entire 20 years.
It could have been invested, for example, every month in the stock market, where the amount would have increased interest. Equity investments would have yielded an average of six percent per year, conservatively estimated.
It would have meant a return of almost 40,000 euros on top of the more than 40,000 euros saved in monthly installments. The borrower would therefore now be around 80,000 euros wealthier than the German who paid a higher interest rate.
The amount would already protect you quite comfortably from the distress caused by the rise in interest rates, if there was still some loan left.
#Mortgages #rise #interest #rates #hits #Finnish #mortgage #borrowers #reason #brought #tens #thousands #savings
