Macroprudential decision: Housing loan cap for residential mortgage loans other than first-home loans to be set at 85%

The Board of the Financial Supervisory Authority (FIN-FSA) will lower the loan cap for residential mortgage loans other than first-home loans by five percentage points, to the pre-pandemic level of 85%. The housing market has recovered well from the shock caused by the COVID-19 pandemic. For households that have taken out new mortgages, total debts relative to income have grown further. This underlines the importance of curbing over-indebtedness.

In June 2020, the FIN-FSA Board raised the loan cap (the maximum loan-to-collateral ratio, LTC) for residential mortgage loans other than first-home loans from 85% to the statutory standard level of 90%. The decision sought to counter the pandemic-induced cyclical risks jeopardising the smooth functioning of the housing market. As house sales and mortgage lending have picked up, there is no longer need for the application of a relaxed loan cap.

Housing market activity picked up in summer 2020. Since then, house sales and mortgage lending have been more lively than in previous years. Finnish house price developments have been moderate but the prices have diverged regionally. At the end of March 2021, the household debt ratio (debt relative to disposable income) reached a record high of 133.6%, 5.1 percentage points higher than a year earlier.

‘Due to the faster growth of residential mortgage lending, there is a risk that even more households will become highly indebted. A lower loan cap will curb the number of the very largest housing loans in relation to collateral. Lenders should also exercise restraint in granting loans that have a particularly long repayment period and are large with regard to the borrowers’ income,’ says Marja Nykänen, Chair of the FIN-FSA Board.

The decision on the tighter loan cap will enter into force on 1 October 2021.

No changes to the countercyclical capital buffer rate or capital requirements for other systemically important institutions

Conditions in the credit market favour maintaining the countercyclical capital buffer (CCyB) requirement at 0%. The primary risk indicator for setting a CCyB requirement – the credit-to-GDP gap – has remained negative, and supplementary risk indicators also support the decision to keep the CCyB rate at its current level.

In accordance with the law, the FIN-FSA Board has identified credit institutions significant for the Finnish financial system (other systemically important institutions, O-SIIs) and has set additional capital requirements (O-SII buffers) for them as follows: Nordea 2.0%, OP Financial Group 1.0% and Municipality Finance Plc 0.5%. There are no changes to the group of O-SIIs, and the O-SII buffer rates remain at their previous levels.

The Finnish financial system is subject to significant structural risks and vulnerabilities. Due to the uncertainties related to economic and credit market developments, however, it is justified to keep the credit institutions’ structural macroprudential buffer requirements unchanged at this stage, even though it could be justified to adjust them based on structural risks. The adequate level of the buffer requirements in relation to systemic risks will be assessed comprehensively once the uncertainty related to the economic impact of the pandemic has decreased and a clearer picture can be formed of banks’ credit risks.

The Board of the Financial Supervisory Authority assesses on a quarterly basis the short- and long-term risks to the stability of Finland’s financial system. If necessary, the Board may tighten or relax the macroprudential instruments, which promote stability. The Board decides on a quarterly basis the levels of the countercyclical capital buffer (CCyB) and the maximum loan-to-collateral (LTC) ratio for housing loans. The levels of the systemic risk buffer and the additional capital requirements for nationally systemically important institutions (O-SII buffers) are reviewed annually.

For further information, please contact:

Marja Nykänen, Chair of the Board of the Financial Supervisory Authority, tel. +358 9 183 2007

View this link to access the appendices listed below

Board’s decision on the application of macroprudential instruments (pdf)
Proposal of the Director General of the FIN-FSA, circulated for comment, on the application of macroprudential instruments (pdf, in Finnish)
Opinions on the Director General’s proposal on the application of macroprudential instruments (pdf, in Finnish)
- Bank of Finland
- Ministry of Finance
- Ministry of Social Affairs and Health
Principles for determining national systemically important credit institutions (O-SIIs) and setting additional capital requirements (pdf)
Macroprudential report 1/2021 (in Finnish)