Macroprudential decision: Financial Supervisory Authority tightens the loan cap for loans other than for first home purchases
The Financial Supervisory Authority (FIN-FSA) tightens the maximum loan-to-collateral (LTC) ratio for loans other than first-home loans by 5 percentage points, to 85%. Household debt is at a historically high level and continues to grow. The purpose of the tighter LTC ratio is to curb debt accumulation.
The maximum LTC ratio for residential mortgage loans taken out for first-home purchases will remain unchanged at 95%. The decision will maintain access to the housing market for first-time buyers.
Household indebtedness is the most significant vulnerability of the Finnish financial system. The debt ratio has risen for the past two decades or so and in the third quarter of 2017 it reached 128%. The higher debt ratio is due to growth in the stock of housing loans and the strong increase in housing corporation loans and the stock of consumer credit.
The protracted growth and historically high level of debt can be considered exceptional. Indebtedness is expected to increase further in the current upswing.
– The purpose of the tighter LTC ratio is to curb household debt accumulation. The rate of debt accumulation may be accelerated by the pick-up in economic growth and the exceptionally low level of interest rates as well as by strong consumer confidence. On the other hand, the loan cap for first-home buyers will remain unchanged, says Dr Olli Rehn, Chairman of the Board of the FIN-FSA.
The FIN-FSA urges banks to avoid very long loan repayment periods that deviate from prevailing practice and the use of long interest-only periods without special reasons.
In addition to Finnish authorities, several international organisations, for example the European Systemic Risk Board (ESRB) and the International Monetary Fund (IMF), have also warned Finland over household indebtedness and the increasingly higher levels of indebtedness.
– The deepening of household indebtedness also reflects the higher rate of growth in consumer credit and housing corporation loans. The high and continuously rising level of household debt is a significant vulnerability of the financial system, and it increases the risks to the housing market and to the economy as a whole, says Anneli Tuominen, Director General of the FIN-FSA.
The decision will enter into force on 1 July 2018.
For further information, please contact:
Olli Rehn, Chairman of the Board of the Financial Supervisory Authority, tel. +358 10 831 2002.
- FIN-FSA Board's decision on the tightening of the maximum LTC ratio (pdf)
- Proposal by the Director General of the FIN-FSA on the tightening of the maximum LTC ratio (pdf, in Finnish only)
- Opinions (in Finnish only)
- Finance Finland (pdf)
- OP Financial Group (pdf)
- What does the stability of the financial system mean?