Mortgages in Finland
Are you buying an apartment or a house? Or just interested in mortgages? I will tell you about different repayment methods, transfer taxes, and what is a mortgage. If you are going to buy an investment home, then it is a different loan, with a slightly higher interest rate.
In brief, the mortgage consists of a reference rate and a margin. At the moment, reference rates are so low that almost the entire interest rate consists of a margin.
According to the loan ceiling regulations, the buyer of the home should have their own at least 15% of the apartment or house price. If a first home buyer, a 5% savings on the cost of the home.
Your income, life situation, and plans also affect your ability to repay your loan. The ability to repay, in turn, affects the availability, amount, and maturity of the loan.
There are also different loan repayment methods:
1. In a loan with equal repayment, the amount of the installment payment is equal for each installment. Instead, the interest rate will decrease after each repayment, provided that no increase in the overall rate results. Borrowing costs are higher in the beginning and decrease towards the end of the loan period.
2. In an annuity system, the amount of the repayment and interest is the same each time for the entire repayment period. Initially, the repayment amount is smaller, and the interest rate higher, and as the loan principal decreases, the repayment share increases, and the interest rate decreases.
3. Some banks also have the option of a flat-rate loan, where the installment remains the same throughout the loan period. The payment period is flexible, longer, or shorter as the interest rate changes, and the payment amount remains the same.
In addition to the price of the home, the buyer pays a transfer tax of 2.0% on condominiums and 4% on the purchase price of private homes and other properties. A first-time home-buyer, if he is 18-39 years old, is exempt from the transfer tax.
You can get a deduction for home loan interest, you can read more about it here.
Well, now let's move on to the mortgage itself. What does it consist of?
The mortgage interest rate consists of the reference rate, and the bank sets the margin rate. Together these constitute the annual percentage rate of charge. You can usually choose between three different options; the Euribor rate, the Prime rate, or the fixed rate.
The Euribor rate is defined by the European Central Bank and can be a 3, 6, or 12-month rate. It means that the interest rate on loan will be adjusted every three months, six months, or a year. A short Euribor rate is often the most affordable option (but I think banks don't offer three month Euribor at this moment).
The Prime Rate is a rate set by the banks themselves, which follows market rates. Interest rates may vary from bank to bank, so make a comparison before deciding.
A fixed-rate is suitable for situations where you do not want to be stressed by interest rate increases. It will give you a fixed-rate loan for several years.
Interest rate hedging
Many banks offer mortgage hedges. The most typical are fixed-rate, interest rate tube, and interest rate ceiling/cap.
An interest rate tube (Korkoputki) means that the mortgage interest rate is set at minimum and maximum limits over a specified period.
Interest rate cap (Korkokatto), as the name implies, means that there is a ceiling on the interest rate on a mortgage.
Hedging products are bank-sold services that will cost you an extra, but in return, you can sleep the night without worrying about rising interest rates.
The mortgage margin refers to the fee paid to the bank for a mortgage. The marginal interest rate is paid in addition to the reference rate for the mortgage.
I went to many banks asking for mortgage interest rate proposals: if you will tell the previous bank's suggestions to the next one, the competition between banks will allow you to get a better deal. The proposal will also be affected by any customer relationship you have or had or valid insurances in the bank.
Below is a table showing the total interest rates % (reference rate and margin) on mortgages for the larger banks in Finland.
Source: Taloustaito 13.3.2019
Personally, I would seriously think about interest rate cap if i would be taking a mortgage right now, as Yle reports that interest rates are rising to the 2020s, but we’ll see ;)