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Economist: Finland has lowest mortgage interest rates in eurozone, but there are risks

Housing loan interest rates in Finland are among the lowest in Europe. Unlike most eurozone countries, Finland's interest rates aren't fixed and, in the long term, riskier.

Asunnon pohjapiirustus ja avaimet.
File photo. Image: Harri Vähäkangas / Yle

European Central Bank (ECB) figures show the average housing loan interest rate in Finland during February was about 0.92 percent, the lowest in the EU.

The chief economist at Finnish bank Aktia, Heidi Schauman, says that the reason they are so low in Finland is that they are linked to variable market rates.

"They're so-called short-term interest rates. In the rest of the eurozone longer-term, fixed interest rates are more common and borrowers pay a premium for that," Schauman said.

But while most European mortgage owners may be paying more, they know that the rates won't change, like they do in Portugal and Finland.

Price trumps security in Finland

"Here in Finland it seems that we prefer lower prices over (a sense of) security, and we carry the burden of market risks. In practice it is a question of custom - it has been like this for a long time. Often people want to do things like everyone else, that's why there are different ways of doing things in different parts of Europe," Schauman said.

In good economic times, the strategy of paying off a mortgage with fluctuating interest rates is a good one. It gives borrowers in Finland more of an opportunity to benefit from the current, very low interest rates than most of their eurozone counterparts.

But Schauman pointed out that borrowers in Finland will have a more difficult time than other Europeans once interest rates begin to rise.

"In Finland most housing loans are based on 12-month Euribor rates, which are adjusted every 12 months. When those rates rise, Finnish housing loan borrowers will notice the increase. Those rising costs depend on the sort of loan that was taken," she said, adding that in Germany 20 year mortgages are often paid off at steady, unchanged rates throughout the duration of the loans.

How rates measure up

But the economist noted that at the end of the day, the final costs of an adjustable rate mortgage are often lower than ones with fixed rates.

The highest mortgage interest rates in the eurozone in February were in Ireland and Greece (hovering just above or below three percent), while countries like Estonia, Belgium and Spain had interest rates around two percent.

An observer might be surprised to learn that housing loans interest rates within Europe vary so much, despite their communal participation in the eurozone.

"Finland's is a good example of a country whose fiscal policy's impact on the economy has been very good. When interest rates change major shifts can be observed in the real economy (employment rate, sizes of GDP and investment volumes) and in the economic situations of ordinary people," Schauman said.

What does the future hold?

"That means that change can also be seen when interest rates rise. But that's the point, and how Finland has effectively been able to quickly adjust household consumption - through interest rate adjustments," she said.

Housing interest rates will likely remain low in Finland for some time, according to Schauman, but said banks do not plan to operate under losses in the long term.

In its most recent outlook Aktia Bank said it expected interest rates to rise for the first time next year.

"It could be that it doesn't even happen then," Schauman said. "In any case, it is clear, barring any surprises, that the central bank will raise rates gradually. We will have very low interest rates for several years to come and it will benefit Finnish borrowers," she said.

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