The Bank of Finland has floated the idea of introducing a mortgage lending cap in an attempt to curb borrowing amid skyrocketing house prices.
The Bank of Finland warns in its regular financial stability assessment that the housing demand that has bottled up during the last few years of sluggish economic growth could be set to erupt as the national economy continues to pick up steam.
The eruption, in turn, would boost the housing market and mortgage lending especially in population centres.
The Bank of Finland estimates that new measures are consequently required to prevent mortgage borrowers from going into insolvency. “Such measures include introducing a new income-based mortgage lending cap, limiting mortgage re-payment terms and obliging mortgage borrowers to make re-payments,” state Jukka Topi and Jukka Vauhkonen, both senior advisors at the Bank of Finland.
They provide an example of the effects of an income-based mortgage cap set at 500 per cent of annual income on a middle-income household: A family with 20,000 euros in savings, 40,000 euros in annual earnings and no assets – with the exception of the house they are interested in buying – to pledge as collateral would be able to take out a mortgage of 200,000 euros and, as a result, afford a house valued at a maximum of 220,000 euros.
“The income based mortgage lending cap would thereby have no impact on the plans of the family, as the required loan-to-value ratio of 90 per cent would limit their mortgage to 180,000 euros.”
The cap would, in the other hand, inhibit the family’s ability to take out a new mortgage in the event that they start looking for a larger or otherwise more valuable house.
Topi and Vauhkonen calculate that if the value of the current house rose by 10,000 euros and the family continued to earn 40,000 a year, they would be able to take out a new mortgage of a maximum of 200,000 euros and, as a result, afford a house worth 230,000 euros. The current loan-to-value ratio requirements, in contrast, would allow the family to borrow as much as 270,000 euros.
“Although an income-based mortgage lending cap is similar to the loan-to-value ratio requirements, its structure makes it a more suitable means to curb borrowing in circumstances where house prices are rising rapidly. An income-based cap ties mortgage amounts to income developments, which are typically stabler than house prices,” write topi and Vauhkonen.
They also acknowledge that supplanting the loan-to-value requirements with an income-based mortgage cap could lead to homeowners taking out mortgages exceeding the value of houses.
“Such households would be extremely vulnerable to disruptions in their personal or the public economy, which would increase the likelihood of banks suffering credit losses. It would therefore be justified to have both an income-based mortgage cap and the loan-to-value requirements in place simultaneously,” they argue.
Aleksi Teivainen – HT
Photo: Jarmo Stenmark – Lehtikuva
Source: Uusi Suomi
