Finnish repayment holidays pose long term risks, warns Moody’s

A move by Finnish banks to allow households amortisation-free periods on their mortgages free of charge is a short term boon for Finland’s economy, but could pose a long term risk to the banking system, Moody’s warned on Monday.

It cited a Bank of Finland report, released on 31 March, that said that households have “seized the opportunity” of amortisation-free periods, noting that Eu3.2bn of mortgages were renegotiated in February, compared with a typical monthly volume of Eu200m, although the figure includes renegotiated loans that may have been adjusted in a way other than to convert to interest-only.

The rating agency said that the temporary removal of conversion costs in February is likely to bring short term benefits, but warned of longer term risks.

“While we are likely to see some short term benefits from higher consumer spending, over the longer term a shift to interest-only loans will pose a risk to the banking system, as lower mortgage payments may entice borrowers to spend more, which would get them out of the habit of repaying loan installments,” it said.

“Furthermore, even though the banks have marketed the step as a short term repayment holiday, they may find it hard to unwind these offers if householders are willing to switch their mortgage providers to maintain their interest-only loans.”

While Moody’s acknowledged that having a small proportion of interest-only mortgages and moderate household indebtedness have contributed to an overall healthy housing market in Finland, it cited Denmark as an example of the risks that could ensue. Introduced in Denmark in 2003, interest-only loans made up around half of all mortgage lending by 2008, contributing to a property boom that peaked in 2007 and was followed by a severe correction, said the rating agency.

“For now, though, Finland’s mortgage market has benefited from mortgage conversion offers,” it added. “Banks’ strong underwriting standards remain unchanged and require that borrowers can afford to repay both interest and principal.

“In addition, free conversions to interest-only are only available to borrowers with a good credit and loan repayment history. Economic growth is also likely to benefit from higher consumer spending, as mortgage payments are lower for some.”