High interest rates plague home owners

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Interest rates have grown significantly in Finland in the past three years, pushing up the total costs of financing home loans.
     Those who took out large loans a few years ago when interest rates were low now have to struggle to keep up with the payments.
     At the request of Helsingin Sanomat, Nordea Bank calculated how much the monthly servicing costs of a housing loan of EUR 200,000 had risen between 2005 and 2008, on the assumption that the loan is paid back in 20 years.
     The reference rate in the calculation was the 12-month Euribor, which is the most common rate for loans used in Finland. In June 2005 it was attractively low - just over two per cent. Repayments were just EUR 1,065 a month.
     
Soon after June 2005 the Euribor rate began to rise, and now it stands at about five and a half per cent. This makes for a monthly repayment EUR 1,453 for the sample loan.
     This is what the case would be if the terms of the contract would state that the monthly payment should fluctuate with the interest rate. The alternative is that the monthly payments remain the same, but the time of repayment fluctuates with the interest rate.
      If the sample loan were taken out on such terms, there would still be more than 33 years of repayment as of June 2008, even though the original repayment time was to have been 20 years. However, this is a mere forecast, which would change immediately when interest rates come down.
     
While the rise in monthly paymens seems dramatic, most people took into account the effect of a possible rise in interest rates on servicing costs when they took out the loan.
     Large banks say that there has not been a significant increase in difficulties in paying back loans in recent years.
     “The rise in interest rates has not brought on such problems, or at least that has not been the only reason. The most important reason for payment difficulties has usually been a cut in income”, says Jussi Mekkonen of Nordea Bank.
     “When interest rates were at two per cent, we made calculations of what the costs would be at five or six per cent.”
     
Bank director Mikko Hyttinen of OP and director Kenneth Kaarnimo of Sampo Bank say that there has not been a significant increase in repayment problems.
     However, Hyttinen says that there has been a slight rise in the number of households whose interest and amortisation payments have been delayed by more than three months. In March such loans represented EUR 127 million, or about a quarter more than was the case a year earlier.
     However, he emphasises that this is a fairly small proportion of the more than EUR 31 billion in outstanding loans taken out by households.
     
The bank directors say that thanks to the good employment situation, problems in paying back home loans have remained relatively minor. A sudden rise in unemployment would have a greater impact on the ability to pay more than the recent rise in interest rates, for instance.
      Leena Kallasvuo head of the credit risk unit of the Financial Supervision Authority, is also not sounding any alarm bells, although she sees some reasons for concern as well.
     “For several years we have said that loans have been gauged to the maximum limits of people’s ability to service them.”
     Kallasvuo notes that young families especially take out large home loans in the Helsinki region, for instance, where housing is expensive, However, she stops short of referring to them as a “problem group”.


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