Thursday 04.06.2020

Finland considering to set legal limits on household indebtedness

A working group of the Ministry of Finance proposed that the amount of a household’s all credits should not exceed 4.5 times the annual gross income of the household when applying for new credit and the maturity of housing loans should not exceed 25 years. The measures under consideration also include limitations to housing company loans.
Photo: Darko Djurin from Pixabay.
Photo: Darko Djurin from Pixabay.

In recent years the indebtedness of Finnish households has risen historically high. At the same time, payment defaults have grown, remarks the Finnish Ministry of Finance. 

Therefore, and because European Union (EU) supervisor has asked the Helsinki Government to take measures to curb what is considered as an overexposure of households to indebtedness, a working group of the Ministry of Finance has drawn several proposals aimed to stop this drift, which could also lead to overheating of the housing market. The proposals also include limitations to housing company loans.

The main measure proposed by the working group is that the maximum amount of household loans would be linked to annual income, according to a press release by the Ministry of Finlance. 

Debt according to income

The working group proposes that the following new measures are considered in order to curb excessive household indebtedness:

  1. Maximum debt-to-income ratio (DTI): The amount of a household’s all credits should not exceed 4.5 times the annual gross income of the household when applying for new credit. The new loan, the previous loans and the share of the housing company loans would be taken into account in the calculation.
  2. Maximum maturity: The maturity of housing loans should not exceed 25 years. During the loan period, payment arrangements could still be agreed, such as interest only periods.
  3. Limitations to housing company loans in new housing construction: A housing company would be able borrow at most 60 per cent of the unencumbered price of the flats to be sold. The maturity could not exceed 25 years, and there should be no interest only periods for five years from the completion of the dwelling.

In addition to credit institutions, the new rules would apply to other creditors as well. The Ministry Finance admitted that there could be exceptions and "under certain conditions, creditors could deviate from these rules.

According to the proposal, the loan ceiling, or the loan-to-collateral ratio, would remain unchanged but in future, it would also apply to others granting housing loans than credit institutions. Nowadays the amount of housing loan may not exceed 85% of the current value of the collateral when granting a loan. For first homes, the ceiling is 95%.

“Our proposal would not significantly tighten granting of housing loans in the current situation. However, we should prepare for the markets to overheat,” says Leena Mörttinen, chair of the working group, Director General.

Supervision transferred

The working group also proposes that all supervision of consumer creditors would be transferred from the Regional State Administrative Agency of Southern Finland to the Financial Supervisory Authority.

At the same time, the regulation concerning the management of insolvency risks and the requirements for assessing credit worthiness would be developed.

The working group considers it important that a positive credit register is introduced in Finland from which a person's all credits could be seen. Its introduction is included in the Government Programme.

Minister Lintilä: "Good basis for discussions"

The working group submitted its report to Minister of Finance Mika Lintilä on Tuesday 1 October.

“The development of household indebtedness is worrying, and the EU supervisor recently recommended measures for Finland to curb indebtedness. It is good that now the matter has also been considered exhaustively in the working group. The report gives a basis for a broad-based discussion on the measures we should take to curb indebtedness,” says Minister Lintilä.

The Ministry of Finance will send the proposals for comments on 1 October. The deadline for comments is on 29 November.