Nordea: Housing loan repayment capacity good in Finland

Housing loan repayment capacity among Finnish households remained good during January-September 2011. However, the index has continued its upward trend due to the moderate rise in housing prices and interest rates: Nordea's index value was 34.5 at the end of the third quarter in 2011 compared to 32.7 at the end of last year. Despite the price rise, the housing loan servicing costs are small thanks to the continued low interest rates.

During the review period, average interest rate rose, however, from 2.2 per cent at the end of 2010 to 2.6 per cent. The highest increase in the index was seen in Lahti, whereas Porvoo and Kokkola witnessed slight decreases.

Housing loan repayment capacity was the poorest in Helsinki (51.2) and the best in Kotka and Kajaani (22.9). The average monthly loan payment in Helsinki grew to 901 euros, which means 55 euros more per month compared to the turn of the year. In Kotka and Kajaani the corresponding payment is now 331 euros per month.

During January-September, home prices in the whole country increased slightly. The average home price in Finland was 167,651 euros at the end of September. In Helsinki it amounted to 282,931 euros, whereas the cheapest homes were available in Kotka, where they cost 103,987 euros on average. Compared to the situation at the end of June, however, home prices decreased somewhat in the third quarter in Helsinki, Espoo, Hämeenlinna, Jyväskylä, Kajaani, Kokkola, Kuopio, Kotka, Lappeenranta, Oulu, Pori, Porvoo, Rovaniemi and Tampere, whereas in Joensuu, Lahti, Seinäjoki, Turku and Vaasa home prices rose.

- As the debt crisis drags on, fears of a new recession have so far kept the interest rates low. But as the typical housing loan period is approximately 20 years, it is probable that borrowers will not get to enjoy this low interest rates during the whole loan period, says Pasi Sorjonen, Nordea's Senior Analyst.

At the prevailing interest rate level, a new housing loan should be well below the maximum limit of the consumer's repayment capacity. Homebuyers should take it into account that the interest rate level is likely to rise during the loan period. Nordea is now using an interest rate of 6 per cent when making loan calculations for customers.

- If you have a fair amount of housing loan proportioned to your income, as customers who have just bought their first home or built a house typically have, using interest rate hedging is still quite sensible. You can seek hedging either with an interest rate cap or by tying part of your loan to a long-term interest rate, for example, Nordea's Private Economist Anu Numminen advises.

In Nordea's index housing loan costs are calculated for a surface area of 76.8 square metres, which, according to Statistics Finland, is the average size of a home in Finland. The loan taken out to purchase a home is 70 per cent of the purchase price and the loan period is 25 years.

The basis for the index is that loan costs, excluding tax deductions, should not exceed 25 per cent of a household's gross income. If the index is 100, the household spends 25 per cent of its gross income for loan servicing. The smaller the figure, the better the household's ability to service the housing loan needed for the exemplary home of the index at present.