Saving encouraged alongside housing loans in Finland: “Your home should not be your only asset”

03.04.18 15:45 | Säästäminen ja sijoittaminen

By extending the typical 20-year payment period of a housing loan to 35 years and by saving regularly on a monthly basis, Finnish customers can accumulate significant amounts of money. Whilst repaying your loan, you will also have accumulated a financial buffer, which comes in handy, for example, when your circumstances change.

In January, Nordea announced that it is now offering housing loans for a maximum period of 35 years to its customers. By extending the loan period, Nordea aims at encouraging Finns to accumulate more assets in addition to their home – and thus to accumulate more assets which are easier to realise.

- Homeownership is still a good way to save money and increase your wealth, especially if your home is situated in or near a growth centre. However, it should not be the only asset class in your household. If all of your assets are tied to your home, you are actually taking quite a risk, Deputy Head Miikka Salminen says.

According to Salminen, housing loan customers should consider accumulating other assets alongside paying back their loans.

- In the long term, you can accumulate significant amounts of money by saving regularly on a monthly basis – even with very moderate expected returns. For our part, we have aimed to lower the threshold for starting saving and developed solutions, such as a digital investment adviser called Nora, to help with this.

Accumulate significant sums by saving regularly

This example calculation by Nordea examines two customers who both take a housing loan of 200,000 euros. Customer A chooses a loan period of 20 years and customer B a loan period of 35 years. Both customers have 1,116 euros per month to spend. Customer A uses the full amount for their loan repayment, while customer B saves the extra 339 euros each month with a moderate expected return of 4.7%. The customers’ situations are examined 20 years after the loan was drawn down.

After 20 years, customer A has repaid their loan and the value of their assets is the current value of their home, deducted by the interest and costs paid for the loan. Customer B has repaid slightly less than half of their loan but has accumulated about 130,000 euros in other assets in the meantime, which makes the value of their total assets about 11% higher than customer A's costs included.

- With these calculations, we would like to make the different options of accumulating assets more tangible. We would also like to encourage Finns to think about building wealth in different ways than before. A home is not the only type of asset available to regular working people, Salminen says.

Diversification protects against an increasingly polarised housing market

Salminen emphasises the importance of diversification; when your wealth is divided between more than one asset classes, your personal finances are better protected against different risks.

- Many Finns live in areas where the value of homes is decreasing. Home trades may take a very long time in areas experiencing a net migration loss. After the loan period, the value of homes may not be the same as or higher than at the time of the loan drawdown, and the value may be difficult to realise. In this respect, too, it would be good to have other assets besides your home, which can easily be converted into cash if needed.

Salminen points out that the idea is not to offer larger loans to applicants; the loan amount will still be determined in a way that a customer should be able to pay it back in 25 years. 

- We must also take the increased loan costs and interest rate risk into account with the extended loan periods.

For further information:

Miikka Salminen, Deputy Head, tel +358 50 3660 533

Satu Malkamäki, Chief Press Officer, tel +358 40 555 1182

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