Home loans|Some of the mortgage borrowers have poor information about the different repayment options. “Banks should go through the loan options better,” says Juha Beurling-Pomoell, general secretary of the Consumers’ Association
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The HS analysis sparked a discussion about mortgage repayment methods.
An annuity loan is the most popular form of loan in Finland.
Banks should go over the loan options better with the consumer.
It is good for the consumer to understand the risks of different repayment options.
On Sunday published HS analysis of mortgage repayment methods sparked an active discussion about whether the different mortgage repayment methods are brought out clearly enough for consumers taking out mortgages.
An annuity loan is clearly the most popular form of loan in Finland.
With an annuity generally refers to a so-called variable annuity, where the loan period remains the same, but the repayment installments change with interest rate changes. In an annuity loan, the portion of the repayment is initially small, but during the loan period, its portion of the monthly installment increases.
In a fixed installment loan, on the other hand, all repayment installments are basically the same, and as interest rates rise or fall, the loan period changes.
In an equal repayment loan, the loan repayment itself is always the same every month, but the payment installment varies depending on the rise or fall of the interest rate.
Financial Supervisory Authority and according to data from the Bank of Finland, last year 81 percent of new mortgages were annuity loans.
CEO of Nordea mortgage credit bank Jussi Pajala said in the article that the annuity loan is a “market constant” in Finland, i.e. the option from which the loan negotiations start.
When applying for a home loan, does the consumer get a clear picture of the different repayment options?
”Banks should go through the loan options better”, states the general secretary of the Consumers’ Association Juha Beurling-Pomoell
Juha Beurling-Pomoell, Secretary General of the Consumers’ Association.
Beurling-Pomoell says that, based on his experience, options other than an annuity loan are basically not opened to the consumer in more detail if the consumer does not know how to ask for them himself.
And not all consumers can.
“The general impression I have received from banks and consumers is that knowledge about loans is too weak.”
Beurling-Pomoell says that banks should go through the loan reduction options comprehensively with each customer so that the customer really understands how different interest rates can affect the loan repayment installments and payment period.
Financial Supervisory Authority of the leading lawyer Sanna Atrilan according to them, they have had no information about the fact that the loan reduction options are not discussed comprehensively enough with the customers.
“Our guidelines are based on the fact that all options must be explained and the customer must have freedom of choice.”
Atrila says that a good way of lending is that the customer understands the different repayment methods and the related risks of interest rate increases when applying for a home loan.
Beurling-Pomoell urges consumers to find out the loan options themselves well in advance of the loan negotiation.
“A general tip is that you don’t buy anything at least very valuable before you understand how the store as a whole works.”
Beurling-Pomoell says that it is good for the consumer to understand how changes in the interest rate affect the repayment of the loan in different repayment options. None of the options is unequivocally better than the others.
He offers, for example, a situation where a consumer has taken out a fixed installment loan with a long loan term five years ago during zero interest rates, imagining that the repayment installment will be the same for the entire loan period.
When interest rates rise, the loan period can only be extended up to the statutory limit, after which the fixed installment has to be increased in order to even cover the interest.
“It can make the consumer feel betrayed, when the fixed installment was not a fixed amount per month and at the same time the loan does not amortize at all.”