Economists from OP Financial Group and Nordea estimate that interest rates will rise to around 1.5-2 per cent within a couple of years. It can mean compromising your own consumption if the mortgage debtor is not prepared for the rise.
Sharply Rising interest rates can punish homeowners’ monthly expenses by hundreds of euros if they are not prepared for the rise.
The week before Easter saw a storm warning, when the 12-month Euribor reference rate, which is popular among Finnish debtors, rose positively for the first time since 2016. Euribor has risen faster than economists forecast during the first half of the year.
OP Financial Group’s Chief Economist Reijo Heiskanen says that according to current market expectations, interest rates could rise to 1.5% in a couple of years.
Chief Analyst at Nordea Banking Group Jan von Gerichin the estimate of interest rate developments in the next few years is similar.
“I personally thought it could be in the order of 1.5 to 2 percent. This is the starting point for interest rates to rise if we do not have any major inflation problems, ”says von Gerich.
Nordea and OP Financial Group are Finland’s largest creditors, and according to the Bank of Finland’s statistics, their combined market share in mortgages was about 68 per cent at the end of last year.
Both von Gerich and Heiskanen warn that soaring inflation makes forecasting difficult. According to Statistics Finland, inflation in Finland rose to 5.8 per cent in March, which is higher than in years. Inflation has been fueled by the war in Ukraine, among other places.
Interest rate has been at a historically low level in Finland and the euro area for many years. Of course, low interest rates have also meant low interest payments on mortgages, and many have, in effect, paid only bank margins. This is coming to a change, especially for those debtors who have bought their homes in the last five years.
For example, a EUR 150,000 mortgage has had to pay EUR 1,050 a year in interest if the bank margin alone was 0.7%. If the same loan is tied to 12-month Euribor, which in turn rises to 1.5 percent, the overall interest rate hurts to 2.2 percent. In this case, the interest payment is multiplied to EUR 3,300 per year.
Of course, interest expenses increase with the amount of the loan. Especially in growth centers and especially in Helsinki, the average mortgage is higher than in the rest of the country, because apartments cost more.
“If there are no softening elements in the loan and you are not prepared, then that is it [korkojen nousu] it bites without a doubt, ”says Heiskanen from OP Financial Group.
Heiskasen there may be several “softeners” mentioned. One example is an equal-installment loan, which keeps the monthly loan service charge the same, but extends the repayment period of the loan as interest rates rise. Other options include long-term fixed-rate loans or products offered by various banks to protect against rising interest rates.
According to Heiskanen, about a third of OP’s large loans have some form of protection against rising interest rates. Von Gerich does not comment on Nordea’s situation, but notes at a general level that customers are generally interested in securing a loan when interest rates rise. The price of interest rate hedging products, on the other hand, is determined by the market outlook.
In other words, when an increase in interest rates has seemed unlikely, interest rate protection has also been advantageous. Now the situation has changed. Von Gerich compares its price to insurance.
“If you take out fire insurance when the forest fire season is already underway, then it will probably cost more.”
Banks are testing mortgage applicants at an interest rate of 6%, which has also been at its highest during the euro period. However, Von Gerich describes the test as an extreme situation. When consumers shell out more of their loans every month, it’s out of other consumption.
Elevated Interest rates can also affect the wealth of Finns in another way, and housing is the most significant asset of many. According to Statistics Finland’s statistics, house prices in Helsinki have risen faster than the national average since the mid-2010s. At the same time, interest rates have been historically low.
Both Heiskanen and von Gerich estimate that rising interest rates will slow down housing prices. However, Heiskanen adds that the rise in interest rates usually coincides with a time when the economic situation is upwind.
“Rising interest rates are curbing house price developments. However, this does not mean any immediate turnaround in the market, ”says Heiskanen.
Von Gerich also estimates that the current interest rate environment may appear as a “headwind” in the housing market, but it will not change the direction of development. However, the high level of inflation in the euro area, due in particular to rising energy prices, raises the question mark.
Heels are rising, but are expected to reach a level that is still historically moderate. During Easter week, the European Central Bank decided to keep its key interest rate still zero, which is helping to curb growth.
On the other hand, mortgage debtors are urged to be prepared for the fact that the situation may change and still be costly for the consumer.
“Even a year ago, such a rise in interest rates seemed distant. If you look at market pricing, it has changed significantly in just a few months, ”says von Gerich from Nordea.
OP Financial Group’s Heiskanen sees little hope that, thanks to the coronavirus epidemic, Finnish households have been able to save money and invest: in the language of banking, to strengthen their balance sheets.
Thus, a buffer has been accumulated in the accounts, which may be available in the near future.
“It is paradoxical that interest rate savings have also been a preparation for rising interest rates,” says Heiskanen.
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