Curbing household indebtedness recommended

Finland should curb the maximum amount of household loans relative to income, recommended the European Systemic Risk Board.

Finland currently has a loan ceiling (loan-to-value) under which the amount of housing loan may not exceed 85 per cent of the current value of the collateral when granting a loan.

The European Systemic Risk Board recommended that in future, only the property securing the loan would be considered collateral in the definition of loan ceiling, said an official press release.

In addition, the maximum maturity of a loan should be limited.

The European Systemic Risk Board also recommended for Finland a totally new instrument to curb household indebtedness. The debt-to-income ratio (or debt-service-to-income ratio) would define how much a household could have loan relative to its annual income.

The new instrument would require amendments to national legislation. The Board recommends that the Financial Supervisory Authority would apply the maximum debt ratio in a non-binding manner to new housing loans already now if the borrowers were considered unable to manage the loan under unfavourable conditions.

The reason for the recommendation is concern over household indebtedness, which has continued to grow. The growth is partly due to the use of housing company loans.

The European Systemic Risk Board notes in its recommendation that Finland has already taken steps to reduce its vulnerabilities. Finland has, for example, tightened the loan ceiling, introduced a systemic risk buffer and gradually dismantled the right to deduct interest on housing loans.

In its response, Finland shares the concern about household indebtedness. The response refers to the work of the working group set up earlier by the Ministry of Finance to examine limitation of household indebtedness.

The Ministry of Finance will publish the report of the working group on 1 October.