Finns are smart borrowers on home loans - pressure on higher lending rates
Press release 24th April 2012
OP-Pohjola's Asuntoaamu event:
Based on the financial skills survey commissioned by OP-Pohjola, 80% of the respondents think that housing is expensive in Finland although 63% of the respondents are not ready to compromise comfort of living even if it meant pulling in one's horns otherwise. The survey revealed that people are conscious borrowers.
- In their decisions, Finnish home loan borrowers and lenders take account of the economic situation and expectations of higher housing costs. In Finland, loan periods are reasonable and borrowers make repayments according to their repayment plan, which is why over-indebtedness is uncommon among home loan borrowers. We do not see the so-called interest-only home loans on the horizon, in which borrowers pay only interest on the principal balance with the principal balance unchanged. These loans are, however, common in the other Nordic countries, especially in Denmark, explains Mikko Hyttinen, Senior Vice President.
Strong housing finance system in Finland - what does a home loan borrower's future look like?
Despite the ongoing sovereign debt crisis in the euro area, the world economic outlook is fair, according to OP-Pohjola's Chief Economist Reijo Heiskanen. This also applies to Finland. The economic outlook presents challenges to consumers but there are also bright sides.
- The employment outlook is quite good, but then again real wages will not rise in the next few years because of the economic uncertainty, i.e. take-home pay will not increase. Interest rates will remain low for some time but not forever, points out Heiskanen.
- Home lending rates will rise. However, low interest rates will compensate for the effects of higher lending rates, which means that borrowing costs will remain relatively low. The availability of home loans has remained good. The Finnish housing finance system has turned out to be strong during challenging times and banks are financially strong, says Hyttinen.
Fixed-rate or variable rate loan?
In Finland, home loans are mostly tied to a Euribor rate and variable rate loans have in fact proven less costly in general. This dominance of variable rate loans is one reason why home loans in Finland have been the cheapest in Europe.
- A fixed-rate loan is a potential alternative if it is important for the borrower that the loan interest or the loan period does not change. For example, fixed rates are currently temptingly low and such loans have won some popularity. When it comes to fixed-rate loans, it is, however, however important to note that early amortisation and repayment are not always possible without incurring costs, states Hyttinen.
Housing market to perk up towards year end
The housing market calmed down slightly during the first quarter of 2012. However, sales varied greatly by location.
- Ordinary homes are still selling well - albeit with a slightly longer time frame for selling - and more expensive homes are also selling fairly well but this requires paying attention to pricing, explains Kenneth Sandberg, Vice President, Estate Agent Services.
The first-quarter best-selling homes through OP Kiinteistökeskus were one-bedroom and two-bedroom flats whose sales in March were almost at the same level as a year ago. Sales of detached and terraced houses have, however, made more moderate progress from the turn of the year but showed growth too. The supply of housing starts has declined this year, which has somewhat dampened the market as a whole.
The time frame for selling homes and their prices have not undergone any major changes over the previous year, although the general economic situation has seen changes.
- Low financing costs that have been in focus in recent public debate encourage people to buy real property. Low home loan costs have provoked debate over rising home prices, but no major changes in prices are expected during the rest of the year, opines Sandberg.
Sandberg predicts a pickup in housing and property markets towards the year end because consumers' financial standing is relatively good and consumer confidence in their financial health shows a slight improvement. Nevertheless, supply will probably remain great, which may lengthen selling periods.
- When it comes to the economic situation, periods of uncertainty will alternate with slight optimism. Now it pays to monitor developments in the housing market because changes in home prices serve as a more sensitive indicator for expected economic development than the consumer confidence indicator.
For more information, please contact:
Mikko Hyttinen, Senior Vice President, tel. +358 (0)10 252 2211
Kenneth Sandberg, Vice President, Estate Agent Services, tel. +358 (0)10 252 4635
Reijo Heiskanen, Chief Economist, tel. +358 (0)10 252 8354
Conducted by TNS Gallup and commissioned by OP-Pohjola Group, the survey had 2,359 respondents across Finland, forming a representative sample of active population at the age of 18-69 years. This was the second time when the survey was conducted.
OP-Pohjola Group is Finland's leading financial services group providing a unique range of banking, investment and insurance services. The Group's mission is to promote the sustainable prosperity, well-being and security of its owner-members, customers and operating regions through its local presence. Its objective is to offer the best and most versatile package of loyal customer benefits on the market. OP-Pohjola Group consists of some 200 Group member banks and the Group's central institution OP-Pohjola Group Central Cooperative with its subsidiaries and closely related companies, the largest of which is the listed company Pohjola Bank plc. With a staff of over 13,000, OP-Pohjola Group posted earnings before tax of EUR 518 million in 2011 and had total assets of EUR 92 billion on 31 December 2011. The Group has over four million customers. www.op.fi
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