Report on means to prevent excessive household indebtedness

On 1 October 2019, a working group operating under the auspices of the Ministry of Finland submitted its report Macroprudential supervision tools limiting household indebtedness. The working group was tasked with assessing methods that could be used to curb excessive indebtedness of individuals and households and its potential negative impacts. A further aim was to assess, based on international experiences, alternative effective tools and to make the requisite legislative proposals to achieve the set objectives. The chair of the working group was Director General Leena Mörttinen, and the working group included expert members from, in addition to the Ministry of Finance, the FIN-FSA, the Bank of Finland, the Ministry of Justice, the Ministry of the Environment, the Competition and Consumer Authority, the Guarantee Foundation and Finance Finland.

The working group was established against a backdrop of elevated household indebtedness. In the third quarter of 2019, households had debt amounting to approximately 127 percent of their disposable annual income. The ratio has doubled since the turn of the millennium. High indebtedness constitutes a macrostability risk at the level of the national economy. On the other hand, consumer credit and so-called payday loans have caused problems for individual indebted households.

The working group assesses household indebtedness as a whole. From a macrostability perspective, the risks are primarily related to households’ high loan-to-income ratio and housing company loans, which have emerged to play a significant role in new-built construction. From the perspective of consumer protection, the risks are related to consumer credit with high interest rates and their granting practices.

Proposals of the working group

The working group proposes new tools to be included in Finnish legislation.

In terms of normal housing loans, the additional tools are so-called borrower-specific tools. At present, Finnish legislation includes only one such tool, the maximum LTV, or the loan amount relative to available collateral. The working group proposes as additional tools a maximum loan-to-income ratio, i.e. the total loan amount relative to household income, and a maximum repayment period to limit the maturity of housing loans.

The maximum loan-to-income ratio would be 450 percent, i.e. the amount of debt including all loans could not exceed 4.5 times the household's annual gross income. The lender could exceed this threshold in 15 percent of the loans they grant.

The working group proposes a maximum maturity of 25 years. The lender could exceed this threshold in ten percent of the loans they grant.

The working group does not propose changes to the maximum LTV ratio.

As a whole, the proposal has been made so as to tighten current housing loan practices only slightly using these new tools.

In terms of housing company loans in new construction, the working group proposes the limitation of the loan amount to 60 percent of the unencumbered price of the flats to be sold. In addition, a similar maximum maturity of 25 years is proposed for housing company loans in new construction as for housing loans (overrun allowed in 10 percent of loans), and there should be no interest-only periods following the completion of the dwelling. As regards the tax treatment of housing company loans, the working group did not make a separate proposal, since the matter is also included for review in the government programme.

As regards consumer credit, the working group proposes a tightening of the default risks and the assumptions used in the assessment of creditworthiness. The lender should not grant credit to an applicant with an unreasonably high probability of default. The proposal includes an authority for the FIN-FSA to issue regulations on maximum values for the assessment of the default risk.

The working group also proposes the transfer of the responsibility for the supervision of operators entered in the register of lenders and intermediaries of peer loans from the Regional State Administrative Agency of Southern Finland to the FIN-FSA. In addition, the working group finds it important that the initiative to set up a positive credit register proceeds quickly. According to the government programme, it is intended to be implemented in spring 2023.

Recommendations of the European Systemic Risk Board to Finland close to the working group's report

In September 2019, the European Systemic Risk Board (ESRB) recommended that Finland implement new measures concerning borrowers to ward off vulnerabilities related to the housing markets. The ESRB recommendations related to housing loans are very similar to the proposals of the working group of the Ministry of Finance. The ESRB recommends that Finland either adopts a maximum debt-to-income ratio or a limit to a borrower’s debt-servicing costs relative to income (debt-service-to-income ratio) as well as a maturity limit for mortgage loans. Furthermore, the ESRB recommends that the calculation of the loan-to-value ratio is revised so that only real estate assets could be considered as collateral. The Board did not have further recommendations concerning housing company loans or consumer credit. Neither did it propose maximum values for the abovementioned instruments.

In addition to legislative amendments, the ESRB recommends that the Finnish macroprudential authority, i.e. the FIN-FSA Board, issues recommendations on tightening actions to entities supervised by it until the new tools will have been implemented as part of legislation.

Follow-up to the proposals of the working group

The working group submitted its report to the Minister of Finance on 1 October 2019. The public consultation concerning the report ended in November 2019. Based on the proposals of the working group and the comments received, a policy will be prepared, and further actions will be taken within the Ministry of Finance as part of official duties.