Key Takeaways
- Easing interest rates will support Finnish and Norwegian households' sound debt servicing capacity. In both markets, we project house prices to recover this year.
- In Norway, we expect amendments to lending regulations to support the housing market and house price growth.
- In Finland, we do not expect challenges faced by real estate funds to spill into the covered bonds but it may delay house price recovery.
- In our view, healthy rating buffers in most covered bond programs will continue to support rating performance.
Overview: Lower Rates May Revive Loan Demand
Both Norway and Finland have well-established covered bond markets, with issuance growing steadily over the past decade. The Norwegian market is the 10th largest, and the Finnish market is the 15th largest considering the volume of outstanding covered bonds. Together, the two countries comprise almost 6% of the covered bond market. Norwegian banks have been comparably active in 2025 as of the end of February, issuing approximately Norwegian krone (NOK) 6.3 billion, while no issuances have been observed from Finnish peers. Norwegian issuers have mainly been active in the NOK-denominated market, only recently returning to the euro-denominated market, with a maturity preference from five to seven years.
The covered bond funding cost has decreased in Finland due to lower central bank interest rates. In Norway, Norges Bank has kept its interest rate stable since December 2023. In addition, the covered bond funding cost depends on the cost of swap. Although both mortgage markets are primarily variable-rate, banks in Norway use standard variable rates, while constant annuity loans remain popular in Finland. The latter means that the amounts paid by customers will be unchanged if the current paid amount covers interest rates. If mortgage payments do not change in line with lower covered bond funding costs, the required credit enhancement to maintain current ratings on covered bond programs is likely to decrease, all else being equal.
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Easing monetary policy to support borrowers' debt servicing capacity
Since December 2023, the policy rate in Norway stands unchanged at 4.5%, despite the gradual decline in headline inflation. From Q1 2025 onwards, the policy rate is likely to be reduced to 2.9% by 2027-end, according to Norges Bank's Monetary Policy and Financial Stability Committee assessment.
The average interest rate for residential mortgages during October-end 2024 was 5.6% and will likely be affected by changes in policy rates. Most Norwegian mortgages are floating-rate. At the beginning of 2024, this, along with higher interest rates, led to increased interest burdens reaching their highest level since 2008. This has contributed significantly to higher household expenses. According to Norges Bank, most households can cope with rising interest expenses. However, as most household debts are floating-rate loans, the expected decline in lending rates will gradually reduce interest burdens and debt service ratio.
In response to the European Central Bank easing interest rates since June 2024, Finnish mortgage rates have declined rapidly. Average interest rates on new mortgages decreased sharply to 3.17% in December 2024, having peaked at 4.73% in October 2023.
With more than 95% of new mortgages having a fixed-interest rate of less than one year--instead of typical floating-rate loans--debt servicing costs have risen since mid-2022 and started to stabilize since beginning-2024. The interest risk for borrowers is partially mitigated using interest rate hedge products, such as a cap or collar structure protecting against higher variable rates. In our view, expected lower mortgage rates will support the sound debt servicing capacity in Finland.
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Finland: Real estate funds in choppy waters
At the start of 2025, seven Finnish real estate funds announced that they were freezing redemptions. Six banks and investment firms were behind the action to prevent investors from withdrawing their money. The move, the first of its kind in Finland, created headlines and raised questions over the recovery of the real estate market.
Real estate funds have been an increasingly popular investor group in the domestic real estate market, but they only account for about 7% of the combined net asset value of funds registered in Finland, according to the Finnish Financial Supervisory Authority.
The challenging Finnish real estate market and particularly sluggish house prices had made it difficult for the funds to sell assets to meet redemption orders. The freeze on redemptions was undertaken to protect the interests of all investors by avoiding forced property sales at depressed prices.
Property funds invest in property assets beyond the scope of the real estate assets that typically back Finnish covered bonds. However, they also invest in some of the same assets that back covered bonds issued by Finnish banks. We consider the challenges facing the property funds to be a result of their specific structural set up and investors withdrawal of funds.
Unlike the real estate funds, covered bonds are fixed-term debt instruments which benefit from dual recourse to the issuer to provide liquidity, while investors can use the covered bond to create liquidity with the central bank. Finally, covered bonds benefit from excess credit enhancement, which cushions the effect of lower valuations and deterioration in collateral performance.
We understand, as a result of the action taken by the funds, they have avoided forced asset sales on a large scale, which has also helped stabilise the real estate market.
Norway: Macroprudential initiative relaxed
According to the Ministry of Finance, current lending regulations, first adopted in 2015 will be continued indefinitely with some adjustments in line with the Norwegian Financial Supervisory Authority's proposals. The main amendments effective Dec. 31, 2024, include an increase in the maximum loan-to-value (LTV) ratio to 90% from 85% for mortgages.
According to Norges Bank, the maximum LTV ratio adjustment would mitigate potentially adverse distributional effects without a significant increase in systemic risk. Furthermore, lenders are allowed to consider risk-mitigating effects of fixed-rate loans when stress testing borrowers' debt servicing capacity. The regulations will be regularly reviewed.
We expect these amendments to support the housing market, house price growth, and first-time buyers.
Current lending regulations include the maximum debt-to-income ratio unchanged at five times the gross annual income and geographic flexibility ratio at 10% (8% in Oslo). Lenders must ensure customers have sufficient funds to cover regular expenses after a 3% interest rate increase, subject to a 7% interest rate floor.
Finland: No change to regulatory lending limits
A government package of macroprudential enhancements took effect on July 1, 2023, to curb household indebtedness from mortgages and housing company loans used in new-build construction. The main changes included a maximum loan maturity of 30 years for housing and housing company loans, a 60% LTV ratio limit on housing company loans for new construction, and an earlier amortization requirement following completion.
Since December 2023, the housing loan cap remains unchanged at 95% and 90% for first and non-first home loans, respectively. The Finnish Financial Supervisory Authority expects easing interest rates and improved household purchasing power to support a moderate housing market recovery.
Sustainable Issuances
Norwegian banks are very active in green bond issuance for unsecured as well as covered bonds. According to the European Covered Bond Council (ECBC), Norway accounts for approximately 18% of total green covered bonds outstanding as of June 2024. DNB Boligkreditt AS and SpareBank 1 Boligkreditt helped pave the way for green covered bonds, followed by several savings banks and associated issuers, including SR-Boligkreditt AS, Sparebanken Vest Boligkreditt, Møre Boligkreditt AS, Sparebanken Sør Boligkreditt AS, Eika Boligkreditt AS, and Nordea Eiendomskreditt AS. Covered bond programs are generally established in line with green bond principles and aligned with EU taxonomy to some degree. Most programs publish taxonomy assessments and second-party opinions. One of the main challenges faced by issuers remains the availability of energy performance certificates.
Issuers have identified most assets based on Norwegian building codes, which provide favorable pricing and terms for eligible customers and offer dedicated lending programs for energy efficiency investments. Although this increases the potential for green covered bond issuance, issuers prefer unsecured senior debt.
OP Mortgage Bank issued the first Finnish green covered bond framework, with a total volume of €1.75 billion since 2021, while Nordea Mortgage Bank followed suit with €2 billion of green covered bond issuances.
According to the ECBC, green covered bond issuance has been lower in Finland than in other Nordic countries, largely due to a focus on data collection and reporting. Most Finnish issuers are looking to issue green bonds, both senior unsecured and covered bonds.
Legal Framework
Norwegian covered bonds legislation was adopted in June 2007 and updated in June 2022 to reflect the EU covered bond harmonization directive. Cover pools are primarily secured by Norwegian residential mortgages and mortgages backed by tenant-owner rights. A few issuers specialize in commercial real estate or public sector loans (below 2% of the volume of outstanding covered bonds). Most mortgage loans are floating-rate and NOK-denominated.
Finland first adopted its legal framework for covered bonds in 1999. Several amendments have followed, most recently, the legislative framework adopting the harmonized EU legal framework, effective July 8, 2022. Cover pools are generally secured by Finnish residential mortgages and, to a lesser extent, housing cooperative loans. All loans are euro-denominated and mainly floating-rate.
Mortgage Market Overview
Norway: House prices on the rise again
Over 2023-2024, Norwegian real GDP growth rebounded to 1.1%, driven by modest household consumption growth supported by easing inflation and lower interest rates. Investment activity was also robust, propelled by significant capital expenditure in the oil and gas sector.
For 2025-2027, we expect average 1.6% year-over-year real GDP growth, driven by recovering consumption, easing financial conditions, and improved business confidence.
The labor market remains robust, with labor supply constraints across sectors. The unemployment rate slightly increased to 4% in 2024 from 3.6% in 2023 due to underlying economic issues and more job seekers from abroad. That said, we expect unemployment to stabilize at about 3.8% over 2025-2027.
Norwegian household debt to disposable income ratio was 235% as of Q1 2024, declining from the peak of 247% at 2021-end. We expect it to decline further driven by nominal wage growth.
Since early 2024, house prices started to recover, despite rising interest rates, with 1.5% growth as of Q2 2024. This is attributed to rising wages, mortgage rate stabilization, and reduced inventory of unsold homes. According to Norges Bank, housing market activities for existing and new homes have risen, with the increase in house prices for existing homes being slightly higher than expected. Norges Bank's bank lending survey also shows that households' demand for loans has increased since Q2 2024, while credit standards for households remained broadly unchanged. We project house price growth will continue on the back of potential easing interest rates.
We view the housing market as being overvalued by approximately 15%, compared with 22% previously (see "House Price Overvaluation Moderates For Europe's RMBS And Covered Bond Markets").
Table 1
| Economic indicators | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| --Norway-- | --Finland-- | |||||||||
| (%) | Real GDP growth | Unemployment | Real GDP growth | Unemployment | ||||||
| 2023 | 0.5 | 3.6 | -1.2 | 7.2 | ||||||
| 2024 | 1.1 | 4 | -0.4 | 8.2 | ||||||
| 2025f | 1.7 | 3.8 | 1.4 | 8 | ||||||
| 2026f | 1.6 | 3.7 | 1.3 | 7.8 | ||||||
| 2027f | 1.6 | 3.8 | 1.2 | 7.7 | ||||||
| Source: S&P Global Ratings. f--Forecast. | ||||||||||
Chart 6
Building stock and new house construction growth levels have historically lagged general population growth, particularly in urban areas, and the gap has widened since 2021. The drop in new construction is mainly due to high interest rates and construction costs. In 2025, housing investment will likely rise but remain weak, and we expect continued strong demand and house price growth.
Chart 7
Finland: Excess supply keeps house prices subdued
Although Finland's economy started to recover in the second half of 2024, the 2024 real GDP growth contracted by 0.4%. Domestic demand started to recover in the second half of 2024 driven by rising wages, low inflation and declining interest rates. External demand from Finland's main trading partners also recovered. That said, we expect a moderate recovery from 2025, with real GDP growth averaging 1.3% between 2025-2027.
Although employment has improved recently, we expect a slight deceleration amid a persisting skills mismatch and tightening labor market. Despite government reforms aimed at addressing gaps through investments in infrastructure and research and development, unemployment will likely remain at 8% in 2025, slightly improving to 7.7% during 2026-2027.
Higher interest rates and softer consumer confidence caused the housing market to remain subdued. In Q3 2024, house prices declined by about 2.8% year-on-year. Housing transaction activity remained relatively low, slightly picking up in Q4 2024. In 2025, we anticipate house prices to recover as financing conditions for mortgage lending improve, consumer confidence increases, and transaction volumes rise. Urbanization will continue to increase house prices in Helsinki and other growth cities, compared with relative smaller cities and non-urban areas, in our view.
We assess the Finnish housing market as being undervalued by 10%, compared with 2% previously.
Residential construction growth has historically exceeded general population growth. New residential construction dropped significantly during the last two years and started to pick up at 2024-end. However, the existing excess housing supply in the past few years will likely keep house price increases lower than Scandinavian peers.
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Cover pool LTV ratios remain resilient
Since 2022, LTV ratios for our rated Norwegian and Finnish programs have not increased significantly, despite house price corrections. Therefore, our view of credit quality remains relatively stable.
Chart 11
Finland: Constant annuities
Constant annuities are a common feature in Finnish cover pools. When interest rates rise, the principal payment postponement protects borrowers from a potential mortgage payment increase if the interest payment is still below the mortgage payment. Total installments will also include a higher interest component. This results in accumulated principal, leading to increased loan maturity for most loans, or the accumulated principal becoming due at maturity for some. The principal for loans without a maturity extension option could accumulate such that it causes a payment shock and increases credit risk. Such loans attract a credit risk adjustment according to our criteria.
As interest rates ease, the significant share of floating rate constant annuity loans in a cover pool represents a positive factor in our cash flow analysis. This is because amortization is steeper, thereby reducing the asset-liability mismatch in the transaction.
Chart 12
Norway: Improved prospects for commercial real estate exposure
According to Norges Bank, real estate exposures represent the largest financial stability risk. Banks' exposure to real estate--the sector most affected by higher interest rates--accounted for 55% of total corporate exposures in 2023. Additionally, commercial real estate (CRE) debt-to-earnings ratios are high, making such companies more vulnerable to higher financing costs. Norges Bank's analyses highlight that high employment supports office space demand and rental income growth, enabling most CRE firms to cover higher interest expenses with current earnings.
According to Norges Bank in 2024, CRE prospects improved, with reduced refinancing costs due to lower bond financing premiums and narrowed margins on banks' CRE lending. In addition, the increased use of interest rate hedges by CRE firms reduced the uncertainty of financing costs. CRE prices have leveled off after two consecutive years of decline and are expected to remain flat in 2025.
Finland: CRE exposure remains limited
The exposure to CRE in Finish covered bonds has been limited historically, but CRE assets are eligible. Over the last decade, households' share of housing company loans have accounted for an increased portion of household debt in Finland due to demand for renovations and new constructions. Given the large share of variable-rate loans and limited use of interest rate hedges, interest-only period expirations on these loans may result in debt servicing costs rising substantially. However, lower interest rates since June 2024 have helped ease debt servicing costs. According to Bank of Finland, the share of nonperforming loans remained at a relatively low level. In addition, the government's macroprudential measures on LTV limits and early amortization requirements helped prevent excessive growth in this sector in our view.
While we believe that CRE asset performance may deteriorate, we believe that the available overcollateralization continues to shield investors from credit deterioration (see "European Covered Bonds Resist Commercial Real Estate Jitters").
Chart 13
Finland - Shortcomings on property valuation practices
In 2024, a thematic review of banks under the Finnish Financial Supervisory Authority was launched to assess banks' compliance with regulation on valuation practices for the real estate sector and their credit risk management related to housing company loans. Shortcomings on property valuation practices were identified, among which the most significant ones are the time when collateral valuation is carried out for nonperforming loans, property location in the context of climate and environmental risk assessment, valuation independence from the credit decision-making process, and collateral monitoring frequency. In relation to housing company loans, the most important shortcomings were related to determining residential property market value and related factors. Supervised banks were required to remediate the identified shortcomings in the review.
In our analysis, property valuations are used to calculate the LTV to determine the default frequency and loss severity. While the remediation of these shortcomings by Finnish banks may have weighed on the credit quality of our rated cover pools, considering that the available credit enhancement in our rated Finnish programs is well above our requirements to maintain current ratings, we expect a limited effect on our ratings on Finnish programs.
Norwegian And Finnish Covered Bond Program Comparison
In 2025 Q1, the credit coverage (foreclosure frequency and loss severity) in most of our rated Norwegian and Finnish programs has slightly increased compared with 2024, mainly due to the higher current LTV ratios.
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Access our Global Covered Bond Insights dashboard to view the rating uplifts assigned to our rated Norwegian and Finnish covered bond programs.
Rating Outlooks
Both Norwegian and Finnish covered bonds benefit from investment-grade-rated issuers with stable or positive rating outlooks, the first recourse for bondholders. On average, our rated programs in Norway and in Finland benefit from 2.0 and 1.4 unused notches of uplift, respectively, which would protect the ratings on the covered bonds in the event of an issuer downgrade.
Norway and Finland are comparable in terms of average target credit enhancement, which is the overcollateralization commensurate with the maximum collateral-based uplift. Where we register a difference between the two is the gap between available credit enhancement and credit enhancement commensurate with the current rating, which is generally tighter in Finland (access our Global Covered Bond Insights dashboard to view the required credit enhancement levels by country).
Table 2
| Norwegian and Finnish covered bond programs: Key characteristics | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Program | Outstanding assets (mil. €)* | No. of loans | Indexed WA LTV ratio (%) | WA seasoning (months) * | Interest rate type | Repayment type | WAFF (%) | WALS (%) | ||||||||||
| Norway | ||||||||||||||||||
|
DNB Boligkreditt AS |
61,576 | 367,582 | 52.97 | 66 | Fixed (5.8%); floating (94.2%) | Amortizing (77.5%); interest-only (22.5%) | 10.11 | 29.99 | ||||||||||
|
Eiendomskreditt AS |
484 | 210 | 49.00 | 44 | Fixed (12.3%); floating (87.7%) | Amortizing (22.08%); interest-only (77.92%) | 51.89 | 51.89 | ||||||||||
|
Storebrand Boligkreditt AS |
3,880 | 16,617 | 56.80 | 31 | Fixed (0%); floating (100%) | Amortizing (48.8%); interest-only (51.2%) | 13.57 | 34.48 | ||||||||||
| Finland | ||||||||||||||||||
|
The Mortgage Society of Finland |
1,033 | 5,357 | 34.02 | 54 | Fixed (2.6%); floating (97.4%) | Amortizing (100%); interest-only (0%) | 15.03 | 7.36 | ||||||||||
|
OMA Savings Bank |
3,008 | 40,447 | 64.50 | 53 | Fixed (11.8%); floating (88.2%) | Amortizing (98.8%); interest-only (1.2%) | 20.91 | 30.72 | ||||||||||
| OP Mortgage Bank (second program 2011) | 9,451 | 129,302 | 53.85 | 68 | Fixed (0%); floating (100%) | Amortizing (100%); interest-only (0%) | 14.43 | 11.65 | ||||||||||
|
POP Mortgage Bank PLC Covered Bond Program |
1,023 | 16,479 | 71.83 | 57 | Fixed (7.8%); floating (92.2%) | Amortizing (94.7%); interest-only (5.3%) | 16.69 | 26.7 | ||||||||||
|
S-Bank PLC CBA Covered Bond Program Mortgage |
3,121 | 37,333 | 65.19 | 54 | Fixed (2.7%); floating (97.3%) | Amortizing (99.7%); interest-only (0.3%) | 17.68 | 23.38 | ||||||||||
| Sp Mortgage Bank CBA Covered Bond Program | 1,751 | 32,358 | 64.75 | 55 | Fixed (16.5%); floating (83.5%) | Amortizing (100%); interest-only (0%) | 17.56 | 23.12 | ||||||||||
| Sp Mortgage Bank PLC | 2,228 | 27,364 | 58.06 | 51 | Fixed (15.4%); floating (84.6%) | Amortizing (100%); interest-only (0%) | 8.8 | 14.96 | ||||||||||
| The Mortgage Society of Finland CBA Covered Bond Program | 1,129 | 4,070 | 21.30 | 64 | Fixed (0.5%); floating (99.5%) | Amortizing (100%); interest-only (0%) | 18.91 | 7.96 | ||||||||||
| *As reported in December 2024 HTT. EUR/NOK = 11.795 as of 31/12. WA--Weighted average. LTV--Loan to value. WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. | ||||||||||||||||||
Related Criteria
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans--Europe Supplement, April 4, 2024
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
- Covered Bond Ratings Framework: Methodology And Assumptions, June 30, 2015
- Methodology And Assumptions: Analyzing European Commercial Real Estate Collateral In European Covered Bonds, March 31, 2015
- Methodology And Assumptions For Assessing Portfolios Of International Public Sector And Other Debt Obligations Backing Covered Bonds And Structured Finance Securities, Dec. 9, 2014
- Covered Bonds Criteria, Dec. 9, 2014
Related Research
- Global Covered Bond Insights Q2 2025: Issuance Holds Steady Amid Market Volatility, March 18, 2025
- Covered Bonds Outlook 2025: Lower Rates, Higher Uncertainty, Dec. 6, 2024
- Economic Outlook Eurozone Q1 2025: Next Year Will Be A Game Changer, Nov. 26, 2024
- Banking Industry Country Risk Assessment: Finland, Nov. 7, 2024
- Finland 'AA+/A-1+' Ratings Affirmed; Outlook Stable, Oct. 25, 2024
- Norway, Sept. 9, 2024
- European Covered Bonds Resist Commercial Real Estate Jitters, Aug. 27, 2024
- Banking Industry Country Risk Assessment: Norway, Nov. 27, 2023
- European Covered Bonds Reach Harmonization Milestone As The Journey Continues, July 12, 2022
- Glossary Of Covered Bond Terms, April 27, 2018
Related Transaction Updates
- Eiendomskreditt AS (Commercial Mortgage Covered Bonds Program), Jan. 16, 2025
- The Mortgage Society Of Finland CBA Covered Bond Program, Dec. 24, 2024
- Sp Mortgage Bank PLC CBA Mortgage Covered Bond Program, Dec. 9, 2024
- S-Bank PLC CBA Covered Bond Program, Oct. 4, 2024
- POP Mortgage Bank PLC Covered Bond Program, Sept. 23, 2024
- Sp Mortgage Bank PLC (Mortgage Covered Bond Program), Aug. 15, 2024
- The Mortgage Society Of Finland (Mortgage Covered Bond Program), June 4, 2024
- Storebrand Boligkreditt Mortgage Covered Bond Program, May 30, 2024
- DNB Boligkreditt AS (Legislation-Enabled Mortgage Covered Bonds), April 3, 2024
- OP Mortgage Bank, May 13, 2024
- Transaction Update: Oma Savings Bank PLC (Mortgage Covered Bond Program), Jan. 24, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Casper R Andersen, Frankfurt + 49 69 33 999 208; casper.andersen@spglobal.com |
| Secondary Contact: | Phuong Nguyen, Paris +33 6 27 06 09 24; phuong.nguyen@spglobal.com |
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