Consumers in Finland could find it harder to borrow money in future, if a new proposal on reducing indebtedness becomes law.
A Finance Ministry working group is looking to fight household debt by limiting total household borrow to 4.5 times their annual income, and ensuring banks count money owed to other lenders when calculating whether a customer can afford a loan.
The median salary earner in Finland makes just over 3,100 euros a month, which with holiday bonuses adds up to around 37,500 euros a year. That gives a likely total debt limit of just under 170,000 euros.
The working group did not, however, recommend increasing the collateral required by homebuyers. At present buyers must stump up collateral worth at least 15 percent of the home’s value, with first-time buyers allowed to buy with just five percent collateral.
“Our proposal would not significantly tighten granting of housing loans in the current situation,” said Leena Mörttinen, who chaired the working group.
Housing company debt
The working group did however propose a maximum loan term of 25 years on mortgage lending, and a limit on housing company debt equivalent to 60 percent of the value of new-build housing.
A lot of housing in Finland is owned through housing companies, in which households hold shares corresponding to their own apartment or property.
The company can borrow money for repairs and renovations, and that debt is then repaid by the shareholders. This debt has been in a grey area in terms of financial regulation, with construction firms offsetting high purchase prices by loading housing companies with debt before properties are sold and offering long repayment holidays which can mask the true cost of the apartment.
That means purchasers can now buy properties for 30 percent or less of the ‘real’ price, with the rest of the debt loaded on to the housing company and which banks and housing loan providers currently are not obliged to check.
Investors have also utilised this funding structure, as housing company debt is much cheaper than business loans.
The measures were welcomed by mortgage lender Hypo’s economist, Juhana Brotherus.
“It’s a good start, but we can’t tell until the effects are visible,” said Brotherus. “It’s a good first step but this situation hasn’t existed before in Finland; previously housing company loans were normally paid off soon after construction.”
“Now in some cities we can see upwards of 70 percent of the value of the home taken on in housing company debt and long interest-free periods which aren’t stated clearly so ordinary people don’t understand what they are getting into.”
The measures would apply to all creditors, not just credit institutions regulated by the Finnish Financial Supervisory Authority (Fiva). Regulation of consumer creditors would also pass to Fiva.
The government programme unveiled this summer already contains a plan for a positive credit register, which would allow lenders to check all the credit held in good standing by customers.
At present they are only able to check defaults, and defaulting on a debt can have severe consequences for an individual in the housing and even employment markets.