Risks increasing in construction-stage financing and housing corporation loans

According to credit institutions, risks are increasing due to growth in participations in housing corporation loans and the number of professional investors, a lengthening of repayment-free periods and differentiation of the housing market. The Financial Supervisory Authority requires that lenders also take into consideration in stress testing the impact of a rise in the interest rate on finance charges when assessing housing loan customers’ ability to pay.
 
In March-May 2018, the Financial Supervisory Authority (FIN-FSA) has studied the lending criteria and risks associated with credit institutions’ construction-stage financing and housing corporation loans. Credit institutions generally consider risks associated with construction-stage financing and loans to completed housing corporations to be moderate, even though the risks have increased due to growth in participations in housing corporation loans and the number of professional investors, a lengthening of repayment-free periods and differentiation of the housing market.

“Due to the rapid growth in housing corporation loans, the FIN-FSA is concerned about the easing of their market terms. We are also directing the focus of supervision and inspections more towards the risks and lending practices of housing corporation loans. In addition, we will assess the need for possible additional measures, such as increasing risk weights,” says Anneli Tuominen, Director General of the FIN-FSA.
 
Based on the FIN-FSA’s study, greater consideration is paid in the credit decision process to the assessment of the ownership share and ability to pay of investor buyers. Based on the responses of credit institutions, significant ownership shares of investors are generally viewed on negatively in the credit decision process and result, as a rule, in stricter lending terms. The FIN-FSA requires, in principle, that the ownership structure of a housing corporation is taken into account, as a rule, when assessing the risks of housing corporation loans. Restricting significant ownership shares of investor owners and stricter lending terms than normal for investor-led projects may, as a rule, be considered to be appropriate risk management.
 
Based on the study, the financial charges associated with housing corporation loans are regularly taken into consideration as an expense adversely impacting ability to pay when assessing the loan repayment capacity of a customer applying for a housing loan. Based on credit institutions’ responses, financial charges are, as a rule, included in full in repayment capacity calculations, even if a repayment-free period is granted for a housing corporation loan. Based on the study, an increase in financial charges due to a possible rise in the interest rate is not, however, generally taken into consideration when assessing a customer’s ability to pay.
 
“In its supervision, the FIN-FSA is paying increasing attention to ensuring that housing corporation loans are taken into account in an appropriate way in stress testing of the customer’s ability to pay,” emphasises Tuominen. The FIN-FSA requires, as a rule, that the impact of a possible rise in the interest rate is also taken into consideration in financial charges when stress testing the ability to pay of a customer applying for a housing loan.Failing to include financial charges in stress test calculations underestimates the adverse impact on ability to pay of a rise in the interest rate, particularly if the customer’s participation in a housing corporation loan is significant.
 
The findings of the study are based on survey responses and attachments provided by credit institutions. Meetings with supervised entities were not held within the framework of the survey.

For further information, please contact:

• Samu Kurri, Head of Department, tel. +358 9 183 5247, samu.kurri(at)fiva.fi
• Arttu Kiviniemi, Analyst, tel. +358 9 183 5237, arttu.kiviniemi(at)fiva.fi

Appendix

Report summary: Risks of construction-stage financing and housing corporation loans have increased – shortcomings in the consideration of housing corporation loans in the repayment capacity assessments of housing loan customers (pdf, in Finnish)