The rise in interest rates is reflected in the wallets of Finns and in the government’s interest expenses faster than on average in the euro area. The reason is interest rate choices, says Nordea’s Jan von Gerich.
Interest rates the rise will hit Finland harder than other euro countries, says Nordea’s chief analyst Jan von Gerich. The decisive difference to other euro countries can be found in housing loans.
Finnish mortgage borrowers have preferred loans with variable interest rates, unlike elsewhere in the euro area. In Finland, by far the most common reference interest rate for mortgages is the 12-month Euribor.
Throughout the 2000s, almost all new mortgages have had variable interest rates, i.e. tied to one year’s Euribor for the longest time.
In the euro area, on average, only about a quarter of new mortgages are attached to variable interest rates. Most loans therefore have a fixed interest rate that remains the same for several years.
Rising interest rates on housing debtors in the euro area therefore hit on average much slower than in Finland.
That is why the increase in interest rates is seen most suddenly in the Finnish economy.
“Finland’s economy is holding back more than the economy of the euro area,” says von Gerich.
Finnish mortgage borrowers have so far not been in trouble with their mortgages, but the rise in interest rates is pinching debtors’ other spending. It, in turn, shrinks cyclically sensitive sectors, says von Gerich.
“The financial impact can be considerable,” says von Gerich.
The statistics do not take into account possible interest rate protections, such as interest rate caps and pipes. According to Von Gerich, interest rate hedges hardly change “significantly the picture that rising interest rates hit Finnish mortgage borrowers clearly faster than the entire euro area”. Von Gerich wrote about it Nordea’s blog this week.
The statistics also do not reveal what kind or how long fixed interest rates have been taken in the euro area. A variable-rate loan is one in which the reference rate is a maximum of one year. Thus, a fixed-rate loan can be tied to the same interest rate for three, five or even ten years.
They change In recent years, interest rates have been lower than fixed rates, which is the reason for their great popularity. On the other hand, it has also been the way of the country.
Although it has been known that interest rates will rise at some point, the current rate has come as a big surprise.
The one-year euribor has already risen to almost 3.7 percent in less than a year, because the European Central Bank is trying to curb inflation by tightening monetary policy. Now, the one-year Euribor is expected to reach its peak level at around four percent.
“This has surprised everyone, including myself, how quickly interest rates started to rise,” says von Gerich.
While market interest rates rise, fixed interest rates offered by banks also rise. The share of variable-rate mortgages in the euro area has been growing now that interest rates are rising.
When at some point interest rates start to fall, it should be visible in Finland faster than elsewhere in the euro area, but for now there is no such thing in sight.
Home loans in addition, the rise in interest rates hits Finnish government spending faster than in other euro countries, because the debt repricing period is shorter.
Average repricing time for Finland’s debts is about five years, while in many euro countries the time is about 7–8 years or even ten years.
Read more: Finland’s indebtedness turned to a completely new position. How worried do you have to be now?
In addition, Von Gerich points out that the importance of construction investments, which are sensitive to interest rate changes, is clearly greater for the economy in Finland than on average in the euro area.
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