Interest on 40-year mortgages may nearly match the loan amount

Interest costs on 40-year mortgages can grow substantially, as a recent Finnish law change extended the maximum mortgage term to 40 years, reports Yle.

The government approved the extension last spring as part of stimulus measures. While longer terms reduce monthly payments, the total interest paid over the life of the loan increases significantly.

For example, a €200,000 mortgage with a 40-year term reduces the monthly payment by €54 compared to a 35-year term. However, the total interest paid rises by over €20,000, based on calculations using an annuity loan at a 3% interest rate.

The European Central Bank is expected to decide on further rate hikes today. Nordea has forecast up to four 0.25% increases this year, pushing the 12-month Euribor from just over 2% to around 3%.

Juho Keskinen, chief economist at the Finnish Hypothecation Association (Hypo), notes that while Euribor rates may not rise sharply, the timing of rate adjustments affects borrowers. At a 3.5% interest rate, the total interest on a 40-year €200,000 mortgage would nearly equal the loan amount itself.

Most Finnish mortgages are repaid in under 25 years, but demand for longer terms is expected. Keskinen believes the change offers more flexibility, though he emphasizes that employment and interest rates remain key drivers of household spending.

Juha Beurling-Pomoell, secretary-general of the Finnish Consumer Federation, warns that while lower monthly payments provide budgetary relief, longer loans ultimately cost more in interest. Banks favor longer terms as they generate more revenue.

Keskinen downplays concerns about increased indebtedness, noting that household debt relative to GDP has declined over the past five years.