Interest Mortgage rates are rising at a tremendous rate – what should a debtor consider now?

Of the year the direction of the euribor rate is now clearly upwards.

The 12-month Euribor, known as the mortgage rate, was still below zero at the beginning of the year, until it first hovered above zero last April and then rose to 0.5 per cent in early June.

On Wednesday, the interest rate jumped to 1.067 percent, which gave Nordea’s chief analyst Jan von Gerichin to state that “expectations of a slow rise in interest rates have evaporated to ashes”.

Currently, the market anticipates that interest rates will continue to rise, with the 12-month Euribor likely to fall by two per cent next year. According to the boldest estimates, the interest rate would rise to as high as 2.75 percent by the middle of next year.

Read more: Nordea’s estimate: Euribor will rise to 2.75 percent next year

The rise in Euribor rates will affect most debtors, but the biggest impact will be on residential debtors. For example, if a person has mortgage debt of EUR 100,000, as Finns have on average, an increase of one percentage point in interest means EUR 1,000 per year.

This is already an item of expenditure that is worth financially preparing for. We asked three experts what things a mortgage debtor should now consider.

Mortgage debtors the luckiest are those whose value of the reference rate is not revised until six months or a year later. At this point, they have a good time to prepare to pay a higher interest rate on their loan.

Adviser to the Bank of Finland’s financial expertise Anu Raijas calls on households to put in place financial buffers that can withstand rising borrowing costs.

“At its simplest, collecting buffers means putting money into savings. In addition, banks provide services to protect interest rates, ”he says.

Interest rate hedges there are practically two types: interest rate caps and interest rate pipes.

The interest rate cap sets an upper limit on the interest rate on the loan, which is not exceeded even if the general interest rate level rises.

The interest rate pipe, in turn, sets both an upper and a lower limit on the interest rate on the loan. The ceiling works on the same principle as the interest rate cap, ie it prevents the interest rate on the loan from rising uncontrollably with the general rise in interest rates. The lower limit of the interest rate pipe, on the other hand, sets a limit on the interest rate on the loan, below which the interest rate does not fall, even if the general interest rate level falls.

Interest rate hedges are not free, but the debtor pays for them in connection with loan repayments. The price of interest rate hedges is also directly affected by market interest rate expectations, which is why their prices have risen significantly in recent weeks.

According to Raijas, it is worthwhile for a mortgage debtor to calculate carefully whether it is more advantageous for him or her to save on rising interest rates than to pay for interest rate hedging.

“The prices of banks’ interest rate hedging services have risen with the rise in interest rates to such an extent that it may be more profitable for a mortgage debtor to try to pay for the rise in interest rates voluntarily.”

At the moment The most vulnerable to a rise in the one-year Euribor rate are those mortgage borrowers whose reference rate is reviewed by the bank in the coming weeks or months.

CEO of Etla, a business research institute Aki Kangasharju emphasizes that, in principle, every mortgage borrower should be able to withstand the rise in the cost of borrowing, as the bank has taken a stress test of the applicant’s income level at the time of applying for a mortgage.

“In the stress test, the applicant’s income level has had to withstand an interest rate of up to six percent. For this reason, most mortgage borrowers should have enough leeway to pay a percentage point or two increase in the interest rate on the loan. ”

If However, the rise in the 12-month Euribor will surprise the mortgage debtor in the coming weeks; Grating them down can alleviate the situation of the debtor somewhat.

“During zero interest rates, banks started to increase euro-denominated payments in connection with loan repayments. Of these, the debtor could try to negotiate with the bank. I believe that there are also differences in these payments between different banks, ”says Kangasharju.

In recent years, it was also possible for a mortgage debtor to reduce his payment burden by asking the bank to change the loan interest rate from one-year Euribor to six-month or three-month Euribor. However, according to Kangasharju, this is no longer possible.

Instead, it is still possible to convert the Euribor-linked loan interest rate to a fixed interest rate. Kangasharju still does not recommend this for a mortgage debtor.

“Fixed rate pricing is based on market pricing. It would have been worth choosing it a year ago, but not anymore. If you link the interest rate on a mortgage to a fixed rate for ten years at this point, it is likely to be more expensive than the 12-month Euribor, which may well fall again in ten years. ”

Interest rate development affect housing prices.

With interest rates low, the threshold for people to apply for a mortgage is low. Vibrant mortgage lending is accelerating home sales, resulting in rising prices.

A rise in interest rates will correspondingly raise the threshold for applying for a mortgage. As lending declines, housing sales will start to decline and prices may start to fall.

There are already signs of declining demand for mortgages if there is confidence in the latest Finnish Banking Barometer. As a result, demand for household mortgages collapsed from the beginning of the year.

Read more: A surprise turn for home sales: Demand for loans collapsed early in the year

Is there a reason for a mortgagee to fear for the value of the home they have purchased?

“Perhaps the mortgage debtor should now think about their own risk tolerance in connection with mortgage repayments and interest payments,” VATT’s research director Essi Eerola says.

He points out that the development of housing prices does not depend solely on the demand for mortgages and the buoyancy of the housing trade. The ability of households to repay their mortgages is equally important. Their ability to repay, in turn, is significantly affected by the current employment situation.

“So far, the employment development after the corona pandemic has been quite good. Only at that point would I be concerned if Finland or the eurozone were to fall into recession and unemployment began to rise. However, I still consider such a scenario to be quite unlikely at this point, ”says Eerola.