Buy-to-let mortgages are becoming more common than ever before and, according to the most recent data, their share of new housing loans stands at 10%. The lion’s share of non-subsidised rental housing is privately owned.
In an economic crisis there can be a risk of a credit slump in which loan losses weaken banks’ ability to extend credit. During the COVID-19 pandemic the risks of corporate lending have grown, but substantial loan losses have been avoided.
The ready availability of finance has eased the position of households during the pandemic, but at the same time it accelerates the accumulation of debt. Indebtedness should be reined in with a debt-to-income cap and limits on the duration of housing loans.
COVID-19 has not shaken the operating capacity of the Finnish financial system. However, there is cause for concern in the prolonged growth of household indebtedness, which could threaten Finland’s ability to cope with future economic crises.
A larger share than before of new housing loans have been granted to highly indebted households. Large amounts of debt are particularly common among households in the growth centres. A debt-to-income cap would rein in excessive indebtedness.
Based on an analysis by the Bank of Finland, the introduction of a debt-to-income cap would have only a moderate impact on long-term economic growth. A debt-to-income cap could dampen economic fluctuations when compared with the current loan-to-value cap.
Housing company loans are increasing household indebtedness and altering the structure of debt. A loan-to-value limit of 60% would reduce housing-purchasers’ substantial accumulation of debt via housing company loans.
COVID-19 has ravaged the banks less than feared. Growth in non-performing loans would weaken banks’ ability to extend credit. A number of methods have been suggested to reduce the number of non-performing loans.
The banks have coped well during the pandemic and have been able to provide credit to businesses and households. Very long loan durations are a cause for concern. New tools are needed to rein in the build-up of debt.