When buying a home in Finland, you want to get a good offer for your home loan, right. To do so, you should always ask for an offer from several banks.
Does this sound obvious?
It is. But still, people in Finland are surprisingly lazy to ask for competing offers to their loans. A resent research report published by Finanssiala ry (former Federation of Finnish Financial Services) showed that almost 30% of home buyers in Finland asked for a loan offer from one bank only.
That is like throwing money away, because mortgage rates between banks can vary significantly. Even a small difference in the loan margin can mean savings of thousands of euros over the decades.
So here are a few things you should consider, before you accept a home loan offer from your bank.
1. Where to start when I need a home loan?
Even if you will ask for offers for a home loan from several banks, it is good to start with your current bank, as they are most familiar with your financial situation. The offer you receive will immediately give you good guidance on what kind of margin you can go hunting for elsewhere.
When you already have an offer on the table, other banks will try to compete with the existing offer. The competition will help you get a good offer for your home loan. Especially if you are in a good financial position, you may get significantly better offers from other banks. The caveat, however, is that most likely you will also need to transfer your bank services to the new bank. But in many cases, switching banks can be a financially good option.
Once you have competing offers, you should revisit your own bank and tell them about the offers you’ve received. When they hear that you may be about to switch banks, they may make a better offer for you. Also, it is good to note that your bank won’t be angry about you asking for bids from different banks. After all, it is common practice and goes to show that you know how to take care of your finances.
Did you know: According to the Bank of Finland’s statistics, there are three major banks, which give out around 80% of all of the mortgages. These banks are OP, Nordea and Danske Bank.
2. Understand what the interest rate on a home loan consist of
The interest rate of a home loan consists of two components: The bank margin and the reference rate. The bank margin is customer specific and is determined by factors, such as your income and life situation. In practice, the more the bank trusts you, the lower the bank margin will be.
The reference rate in Finland is typically tied to the Euribor 12-month rate, which is determined by EU money markets. In the case of a mortgage, 12-month Euribor means that the interest rate is reviewed every year. In other words, the interest rate will be fixed for one year, after which the rate will be adjusted to a new level which is determined by the EU money markets.
So what does all of this mean in euros?
Imagine Rob has a 100 000€ mortgage, tied to the 12-month Euribor, which is 0.1% at the time of borrowing. The bank offers Rob a bank margin of 0.9%. Therefore, the total interest rate of Rob is 1%. During the first year, his monthly payment will be around 460€, out of which around 80€ goes to interest payments and the remaining 380€ goes to paying off his loan.
Most banks have a loan calculator that you can play around with. The image below shows the mortgage calculator by OP.
Do note that the interest rate is not equal to the “actual interest rate”. The latter rate includes some additional fees, such as account fees and loan arrangements fees. When comparing mortgage offers, take into account the actual annual interest rate of the loan.
3. Examine the differences in interest rates on home loans
In Finland, home loans are currently much cheaper than in some other countries, such as the USA.
A financial magazine, called Taloustaito, does a regular survey, where they ask banks what type of interests rates they would charge for a home loan of 150 000€. Based on the survey results, in the beginning of the year 2022, Finnish banks were providing home loan rates that varied between 0.54% and 0.90%. Of course, the interest rates cited above are general numbers and banks will look at each customer on an individual basis, but it does go to show that getting a good offer for your home loan can save you hundreds of euro’s a year, and thousands during the whole duration of your home loan.
That said, there are differences in banks that you should be aware of. To read more about the best banks giving out home loans in Finland, check out my blog post on the topic.
4. Consider which home loan repayment method is best for your life situation
There are several methods of repaying your mortgage. In essence, this will effect how long you repay your loan, how your monthly installment is formed, and what your interest costs are.
There are three options to choose from:
Annuity: In an annuity loan, each repayment installment (i.e.,installment + interest) is initially equal. However, as the reference rate (e.g. Euribor 12-month) changes, the amount of the monthly installment also changes. This option is suitable for people who have a stable income and want to pay off their mortgage in a pre-determined time (e.g. 20 years).
Fixed Equity Loan: If you want to calculate the exact monthly budget for your loan, a fixed equal loan may be the best solution for you. In this repayment method, each repayment installment is equal, and as the reference rates change, the loan term is either extended or shortened.
Installment: If you want to pay off larger installments at the beginning of the loan period, an installment may be right for you. In this case, you repay the loan principal by the same amount each month, which means that the euro amount of interest is, of course, higher at the beginning – the interest paid on EUR 100,000 is higher than if you were to pay interest on the loan capital of EUR 50,000. As reference rates rise, fees also rise and vice versa. Equal repayment may be a suitable solution if the larger repayment installments in the initial phase of the mortgage do not bother you and you want to start repaying the loan as quickly as possible.
5. Consider whether flexible payments of your home loan are important to you
Many banks will offer a service where for a certain period of type (i.e. 6-12 months), you will not need to pay off your loan. The only thing that you will need to pay during this time period is the interest rate and any possible bank fees, such as an account fee. This is a useful option if you suddenly become unemployed, or would want to have some extra cash in your account for a bigger purchase.
The price of the service varies from bank to bank, so if you think you may want to use this option, ask your bank what they will charge. In many cases, banks will offer this service for free if used at the beginning of your mortgage. Especially Nordea Bank prides in providing flexible services, as I write in my blog on the best banks for a home loan in Finland.
6. Which home loan reference rate is best for your life situation?
In Finland, the most common reference rate for a mortgage is the 12-month Euribor. Euribor interest rates are calculated daily, but the 12-month Euribor reference rate for a mortgage means that the interest rate on the loan is reviewed annually. In other words, you will have one rate for 12 months, after which the rate will be readjusted to what the daily rate on the market is.
There are also an Euribor 6 month, 3 month etc., but typically banks do not allow to use these on mortgages.
Banks may also offer their own type of reference rate. In these cases, you want to examine whether they are any better than the Euribor rate. Typically they are not.
Banks may also offer floating rate mortgages or fixed rate mortgages. In my online course I discuss in detail the circumstances when these can be beneficial and when to avoid them.
7. Ask for competing home loan offers even if you’re already taken out a mortgage
If you already have a bank loan and now find that you’ve made a bad deal, don’t worry. You can still ask for competing offers from other banks. If you get good offers, there is nothing stopping you from switching banks. Plus, if you turn to your bank with a better offer, they will most likely try to match the offer you’ve received from another bank.
As a personal example, I had been paying off my mortgage for around 2 years when I contacted my bank for ask for a better offer. During the phone call, I got a 0.05% decrease on my mortgage. Though it is a small percentage, already during the first year that amounted to 100€ savings. In total, I will save over 1000€ in the long run. So, not bad for 15min of my time.
8. Collect all the necessary information before asking a bank for a mortgage
The bank needs comprehensive information about you and your life situation before making a mortgage offer. Therefore, before asking for offers, gather all the needed information. In addition to information on the size of the loan needed, the bank will be want to know the following:
- monthly income (salary receipt may be needed)
- the quality of your employment relationship (long-term vs. short-term)
- existing loans, if any
- monthly expenses (food, housing, other expenses)
- net-worth (real estate, investments, securities, etc.)
- The amount of your savings and any additional collateral for the mortgage.
If you are applying for a mortgage together with your partner, the same information is also needed from your partner. Of course, your credit information must be in order for the loan to be granted. Exceptions are rare.
9. Dare to ask “stupid” questions if necessary?
People applying for a mortgage for the first time tend have a lot of questions on their mind. Especially if you are an expat, you probably have even more questions. After all, each country has different ways how things work.
So there are no stupid questions.
What ever questions you have, the bank clerk probably answers those same questions many times a week.
To truly gain confidence in buying a home in Finland, check out my services, including one-on-one phone consultation and a step-by-step online course on buying a home in Finland.