The most popular way in Finland to protect against higher interest rates is an interest rate cap – it protects a home loan against higher interest rates and keeps loan costs moderate in the interest rate environment that is higher than now. Borrowers are now taking interest rate caps particularly for new home loans and for a long loan term: the interest rate protection of 83 per cent of the new interest rate cap agreements covers 10 years or longer.
In February 2022, loans with protection against higher interest rate accounted for 30 per cent of OP’s home loan portfolio and new home loans with interest rate protection accounted for 41 per cent. Interest rate protection has mostly been used in detached houses, of which half has been protected against higher interest rates.
“The Russian attack on Ukraine will cause uncertainty to the interest rate environment and we should prepare for higher interest rates. Young people and low-income people taking out a new home loan are most interested in interest rate protection products. Demand for interest rate caps tends to focus on long protection periods and low interest rate cap levels. The far and away most popular interest rate cap is 0.01 per cent,” says Kaisu Christie, SVP, Mortgages, Retail Loans and Real Estate Business at OP.
OP Financial Group has estimated that the reference interest rate of many home loans, 12-month Euribor, will turn positive in 2022 and rise to one per cent in one or two years.
Higher interest rates will particularly affect large housing company loans
Housing company loans are markedly less protected against higher interest rates than home loans. Only less than six per cent of OP’s housing company loans are protected against a rise in interest rates.
“The biggest reason for this low interest rate protection rate is that housing companies are not aware of the opportunities to protect their loans against higher interest rates and so does not come up for discussion at general meetings. The possibility of interest rate protection should, however, be determined because a rise in interest rate particularly affects large housing companies,” says Heikki Peltola, Director, OP’s SMEs.
The housing company loan averages 300,000 euros but some companies have taken out loans worth millions. Large housing company loans apply particularly to new buildings where housing company loans must usually be managed after construction by shareholders in companies that have performed pipeline or facade renovation.
“Even a one per cent interest rate increase is felt in the shareholder’s pocket. If the shareholder annually pays 900 euros of the housing company loan, with interest, and the interest rate will rise from one per cent to two per cent, the loan servicing costs per shareholder will rise by 17 per cent, or to 1,050 euros per year,” says Peltola.
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OP Financial Group Corporate Communications, tel. +358 10 252 8719, viestinta@op.fi