FAST RISING interest rates can destabilize the finances of unprepared mortgage borrowers in Finland, reports STT.
Euribor 12, the most popular benchmark rate for home loans in Finland, rose faster than analysts expected in the first months of the year, rising above zero last week for the first time since 2016.
Reijo HeiskanenChief Economist at OP Financial Group, and Jan von GerichNordea’s chief analyst, told the Finnish News Agency on Monday that they expect the rate to rise to 1.5% over the next two years, but warned that forecasts are currently difficult due to accelerating inflation.
“I personally thought it might be in the range of 1.5 to 2 percent,” von Gerich said. “That’s the benchmark projection for interest rates assuming we don’t have a bigger inflation problem.”
Consumer prices rose 5.8% year-on-year in Finland in March.
Nordea and OP Financial Group are Finland’s largest mortgage lenders, with 68% of home loans outstanding at the end of last year, according to the Bank of Finland.
STT wrote on Monday that a borrower with an outstanding home loan of 150,000 euros only had to pay 1,050 euros per year if the bank margin is 0.7%. Assuming that the Euribor 12 rises to 1.5% and the total interest rate for the borrower to 2.2% accordingly, the annual fee would more than double to 3,300 euros.
Banking margins vary approximately between 0.5 and 1.0 percent in Finland.
Since the house is the most valuable asset of many households, interest rates can also have another impact on the wealth of Finnish households. Heiskanen and von Gerich both believed that rising interest rates will slow the rise in house prices, but not to the point of reversing the upward trend in the housing market.
“The fact that interest rates are rising will dampen the development of house prices. This does not mean an immediate turnaround in the market,” Heiskanen said.
Although inflation rates should settle at a reasonable level by historical comparison, mortgage borrowers are advised to prepare for unexpected events that add to their borrowing costs.
“Even these types of interest rates seemed like a very remote possibility a year ago. If you look at market prices, they’ve changed dramatically in just a few months,” von Gerich said.
Heiskanen stressed that it is positive that households have been able to save and invest during the coronavirus pandemic, creating buffers in their bank accounts that could prove useful in the near future.
“It is paradoxical that saving during the pandemic was also about preparing for rising interest rates,” he told STT.
Aleksi Teivainen – HT