Rising interest rates have increased the popularity of reference rates with a term shorter than 12 months and prompted customers to make additional repayments. On the other hand, the use of repayment holidays has grown only slightly.

After years of low rates, interest rates on home loans began to rise exceptionally sharply at the end of last year. Last summer, nearly all home loans issued by OP Financial Group were tied to a 12 month Euribor rate. As interest rates started to rise, 3 and 6 month Euribor rates emerged as popular alternatives to the 12 month rate.

Last April, as many as around one in four home loans issued by OP Financial Group were tied to a reference interest rate with a short term.

"After years of near zero interest rates, customers are looking at different options more actively than before, which is a positive development. The current situation can be thought of as a return to normal after a period of zero interest rates," says Satu Nurmi, SVP, Mortgages and Real Estate Business at OP Financial Group.

With a market share of around 39%, OP Financial Group is the largest issuer of home loans in Finland.

Interest rate cap can also be transferred to a new home loan

While most customers have seen the interest on their home loan updated to current rates, some have still enjoyed significantly lower rates since last summer. Out of all home loans issued by OP Financial Group tied to the 12 month Euribor rate and without interest rate protection, 60% have not yet had their annual interest rate adjustment.

"Many people prefer interest rates with a longer term precisely because they offer more financial stability and predictability in an uncertain environment. What also made shorter-term rates more attractive was the fact that differences in rates varied significantly between interest types. Since then, the difference between long-term and shorter-term rates has decreased," Nurmi says.

Customers can also hedge against rising interest rates with an interest rate cap. Currently, around one in three home loans issued by OP Financial Group are protected by an interest rate cap.

"In the first quarter of 2023, the total benefit of interest rate caps to our customers was around 17 million euros. When switching homes, it's worthwhile bearing in mind that interest rate protection can also be easily transferred to the loan for the new home," Nurmi says.

No significant increase in loan repayment holidays

In other ways, the downturn in the housing market is also visible in home loans. Between January and April this year, the number of home loan applications received by OP Financial Group is down around 23% compared to the same time period in 2022, when the housing market was still clearly more active.

Payments on current home loans are still made punctually. At OP Financial Group, the number of loans on repayment holiday has grown only slightly, and there have been no significant changes in the numbers of other applications for repayment plan changes.

"We even expected to see an upturn in the number repayment holidays during the winter but so far, our customers seem to have managed their loan repayments well," Nurmi says.

Between January and April, the number of additional loan repayments made by customers is up around 10% from last year.

"The median value of additional repayments has been around 500 euros. Where possible, customers have tried to make additional repayments on their loan before the interest rate adjustment date," Nurmi says.