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Housing loan

In most Finnish households, the home is one of the major acquisitions in life, and it is mostly bought using a housing loan from the bank. The loan contract is always binding, and when the loan is taken out, it is advisable to plan the loan amount and the size of the repayment allotments so that you can manage the credit, even if your life situation changes or the interest rates go up. Today, the loan contracts are very long, and a loan period of, for example, 15 years may normally include several types of life phases.

Generally, the loan decision is based on many documents. A usual loan contract includes the promissory note (IOU) and its general terms and conditions as well as the pledge and/or surety obligation as well as the general terms and conditions of the pledge/surety obligation.  The loan contract is an agreement including the most varied issues. The core issues are the loan interest rate and margin, repayment period and the amount of the repayment allotments.

Housing loan interest rate

The housing loan interest rate may be bound to a reference rate of interest in which case the payable interest is constituted by a Euribor or prime interest rate plus the margin on top of it. For example, those choosing the 12 month Euribor rate will have the same interest rate for a year at a time. The level of the 12 month Euribor is reviewed once a year, the interest review date, and will involve the use of that day’s value plus the margin as the interest rate for the next 12 months.

The credit contract may also have a fixed interest rate which means that the interest remains the same over the agreed fixed-rate interest period. In long housing loans, the fixed interest rate is normally not set for the entire loan period, but the fixed-rate period is agreed in the beginning of the contract period, for example, for 3 years. After the fixed-rate period, a reference rate of interest starts to be used, plus a margin, as agreed in the loan contract.

The loan with a fixed interest rate will provide the debtor with economic predictability but then again, they might have to compensate the bank for a premature repayment of the credit if the interest rate decreases after the loan is taken. The customer must pay an agreed fixed interest rate irrespective of the trends in the market interest rates during the loan period. A loan with a reference rate of interest can be repaid to the bank at any time without the need to pay a corresponding compensation.

Loan repayment allotments

The loan can be an annuity repayment loan, one with a fixed amortisation schedule or a constant payment loan. In an annuity repayment loan, the agreed loan period is fixed and the last repayment day is known from the beginning. The variation of the reference rate of interest impacts the repayment allotment sums.

In the loan with a fixed amortisation schedule, the credit repayment is the same sum in euro every month, but the amount of each allotment varies according to the rate of interest valid at each given moment. In this type of loan, the monthly allotments normally diminish towards the end as the credit capital is repaid.

The constant repayment loan is one where each repayment allotment is equal. The variation in the interest rate level impacts the loan period. When the rate of interest goes up, the loan period becomes longer while it is shorter when the interest rates go down.

Changes in loan contract

Taking a leave from repayments or changes in the reference rate of interest or the repayment schedules are normally changes to the original contract. The bank has no obligation to agree to the changes proposed by the customer, and at its own discretion, the bank can make the consent subject to new terms, such as a higher margin. If the customer and the bank have from the first contract talks on agreed on the customer’s right to leave of repayments or other changes during the loan period, it is not a change per se, but implementing the valid contract. In that case, the bank cannot impose any conditions on the exercise of a right mentioned in the contract.