Borrowers going back to housing loans linked to banks’ prime rate
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Nearly half of all new housing loans are linked with the prime interest rates issued by banks.
"There has been a clear change in demand. In recent times, 40-45 percent of new housing loans have been linked with the prime rate", says Timo Teinilä, Deputy CEO of the Helsinki OP Bank.
The trend has also been noticed at Nordea Bank, where 40 percent of all new housing loans are linked with the prime rate.
"The situation changed last autumn when the 12-month euribor rate exceeded the bank’s prime rate. Still in September only 15 percent of new housing loans were tied to the prime rate", Luukkanen says.
At Optia, the largest member of the Savings Bank Group, more than 60 percent of new housing loans are tied to the prime rate.
The prime rate is a bank’s own reference rate, which it sets according to its own expectations on currency rates and cyclical trends. The prime rates were introduced in the early 1990s, with the aim of balancing out sharp fluctuations of market interest rates.
Now the prime rates quoted by most banks stands at 2.75 percent. On Tuesday, the 12-month euribor rate was 3.30 percent. Banks add their own interest margin to those rates when they lend money. More than 90 percent of existing housing loans are still tied to the euribor rate.
Timo Teinilä says that the increased popularity of prime rate-linked housing loans reflects the way that Finns borrow money to buy a home: customers typically choose the interest rate that is the cheapest at the time.
"We have not made any recommendations on behalf of the prime rate. It is my understanding that the one-year euribor and the prime rate should not differ significantly", Teinilä says.
"It is my personal opinion, however, that in the long run, short-term interests are cheaper", Teinilä says.
The prime rate has come under criticism for fluctuating fairly quickly behind market interest rates, but banks do not reduce it quite so fast when situations change.
A similar conclusion has been draw by Seppo Rekonen, head of Suomen Rahatieto, a private company that monitors the banking sector and makes price comparisons.
"I would prefer to trust the market, rather than the boards of directors of banks, who decide on prime rates", Rekonen says.
"A housing loan is a long-term investment, and does not really fit together with the three-month euribor. The one-year euribor gives households more protection and predictability in payments", Rekonen points out.
Helsingin Sanomat
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| 17.5.2006 - TODAY |
 Borrowers going back to housing loans linked to banks’ prime rate
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