A customer shook hands with an employee in an office of Danske Bank in Helsinki on 21 March 2018. (Martti Kainulainen – Lehtikuva)


THE GOVERNMENT of Prime Minister Sanna Marin (SDP) is expected to take action to rein in the indebtedness of households in Finland.

STT on Monday reported that the government is mulling over instituting a cap on total household debt, including housing loans and other forms of debt, equivalent to approximately 500 per cent of the annual gross income of the household.

A household with annual gross income of 40,000 euros would not be able to have more than 200,000 euros in debt.

Pauli Kariniemi, the director of financial markets at the Ministry of Finance, pointed out to the news agency that, as a proportion of income, the debt burden of households taking out new housing loans has continued to increase in the past two years.

“Calculations at the Bank of Finland suggest the debt ceiling would have to be set at about 500 per cent because of this development, if the intention was to limit the direct impacts on lending. The scaling of the debt ceiling will indeed be evaluated in conjunction with preparing the proposal,” he stated.

A task force at the ministry proposed less than two years ago that the total debt burden of households be capped at 450 per cent of annual gross income and the repayment period for housing loans at 25 years.

The ceiling would come into play when a household applies for a new loan.

Although no political decision on the measure has yet been made, sources of the news agency gauged that the debt-to-income ratio will likely be raised from the proposed 450 per cent to 500 per cent. Also other details of the proposal may be adjusted after the window for commenting on the draft bill has closed.

The bill would also cap the debts of housing companies at 60 per cent of the debt-free prices of housing units for sale, the repayment period for housing company loans at 25 per cent and prohibit instalment-free periods in the five years following the completion of construction.

The bill is expected to enter into force in 2022.

The debt ceilings are not an attempt to affect lending practices but rather to serve as a backstop preventing the country from going down the road of excessively large and lengthy loans.

Kariniemi told STT that the bill would grant creditors the possibility to allow households to exceed the ceiling by up to 15 per cent for a pre-determined period of time on grounds factors such as wealth.

Ville Voutilainen, an economist at the Bank of Finland, highlighted to the news agency that contrary to the common expectation, the instrument would not impact first-time house buyers but rather households that have already accumulated debt.

“Out of people applying for new housing loans, the highest debt-to-income ratios are found in those who already have old debt. These can include old housing loans and consumer credit,” he said.

Calculations by the Bank of Finland and Financial Supervisory Authority reveal that households whose debt-to-income ratio exceeded 450 per cent after taking out a new loan accounted for 28 per cent of the euro-denominated value of housing loans granted last year. Slightly over one-fifth (21%) of the loans were granted to households that, as a result, had a debt-to-income ratio higher than 500 per cent.

High debt-to-income ratios are common especially in population centres, where housing loans are larger on average than elsewhere in Finland. The typical debt-to-income ratio of first-time house buyers was 368 per cent last year – 403 per cent in the capital region and 335 per cent in other parts of Finland. The ratio stood at 356 per cent for people swapping houses and 330 per cent for people buying property as an investment.

Over 12 per cent of new mortgage borrowers had repayment periods of over 29 years at the end of April.

Aleksi Teivainen – HT