The Bank of Finland calculates an imputed interest margin on new housing loans, housing corporation loans, and non-financial corporation loans. The imputed interest margin is the difference between the agreed annual interest rate and the monthly average of the reference interest rate, but it includes interest rate hedges purchased by households if they involve fees payable to the bank. In spring 2022, households purchased a large volume of interest rate hedges, which increased the agreed annual interest rate and the imputed interest margin. However, in autumn 2022, the reference rate on housing loans rose steeply, reducing the volume of interest rate hedges purchased and resulting in a decline in the imputed interest margin on new loan drawdowns.
There is a timing issue related to new drawdowns, as the imputed margin may underestimate the real margin in a rapidly evolving interest rate environment, especially when drawdowns are made in instalments and the reference rate changes between drawdowns. To address this, the imputed margin on real new agreements, where the entire agreed loan amount is recorded at the time of inception of the agreement, can provide a better indication of developments in the real housing loan margin. However, the margin calculated based on new agreements still does not eliminate the effect of interest rate hedges.
The insights presented in the article are also partly applicable to the imputed margin on new loan drawdowns by housing corporations, which includes housing companies and other housing corporations. The demand for interest rate hedges and their impact on the imputed margin may vary over time based on market conditions and households’ appetite for hedging against rising interest rates.