The paradox of the "best" mortgage rate

January 13, 2021 - 7 min read

By Erik Bennerhult

The best mortgage paradox

Every year Finansinspektionen and Erik Thedéen proclaim that the profit margins from mortgages at Sweden’s biggest banks continues to rise. They encourage us as consumers to negotiate better interest rates. But is this really possible?

Mortgage comparison paralysis

We Swedes are great at comparing prices. Whether it is which grocery store has the best offers, or which phone subscription is best for our kids, we are on it. We are even better at great finding deals online, making the most of price comparison sites to buy home appliances or book our next trip. For many of us, price comparison is a reflex, there is an internal monologue that says, “this is a good price, but can I get a better one somewhere else?”

How is it that when it comes to our biggest monthly expense, our mortgages, that we are completely paralysed?

Well, firstly, it is difficult to know if the amount of interest we are paying is good. There are so many questions that remain unanswered. What do our neighbours pay? When did they buy their apartment? Are we paying too much? 

For those with mortgages one banks money is the same as another bank’s money, they are completely interchangeable. However, we as consumers are completely unique. Not only do we have different needs, but we have different incomes, and we paid different amounts for our homes. It makes it even more complicated to compare interest rates with others. So, determining if we are paying a fair amount for our mortgage is almost impossible.

The paradox of the best mortgage rate

The mortgage comparison playing field

One of the biggest challenges when trying to switch mortgage banks is that in a normal situation of trying to negotiate the best deal for something we shop around. However, in the world of mortgages getting multiple quotes from different banks is not a great tactic. Partly because one application takes so much time, but more importantly, because each bank will do a separate credit check. Each application therefore will lower your credit rating. Meaning that, regardless of all other factors, with each application submitted the offers you receive will get worse.

At the same time, this inability to shop around is further amplified by the new banks need for an amortisation certificate. It is used to evaluate how your current bank determines the amortisation terms and is an attempt to slow the rise of house prices and reduce household debt. For security reason this document must be supplied by your current bank. On top of that, bank secrecy means your new bank cannot request the information directly from your current bank, you have to do it.

A market failure of mortgages

The amortisation certificate is incredibly difficult to obtain. To get it, almost all banks require you to get in contact with your existing bank, likely involving a physical meeting, and then you need to wait for a week or more for it to arrive by mail. In the fast-moving world of property buying, this creates a huge roadblock. The sole exception to this is SBAB, the only bank where consumers can digitally download the amortization basis. With all other banks this is far from easy. A quick search on the SEB website, for example, shows you need to contact the bank to order an amortization certificate. Others such as Nordea or Swedbank do not have any information on their websites at all.

Then, when we apply for the amortisation certificate something strange happens. Sometimes it happens on the phone when we request the certificate and sometimes when we are in the meeting to pick it up. But our existing bank will reach out to us personally to convince us to stay. They are suddenly ready to offer us a better deal. They will often make us an offer that is a few points (one point actually corresponds to 0.01%) lower than our existing rate.

Suddenly we become the proud winner of a better interest rate. Your job is the same, whoever you live with is the same, your home is the same. What changed? Well, suddenly your bank has become aware of the fact that you want to leave. In any other situation where you as a consumer choose another product you do not have to involve the company of the product you want to leave. Imagine changing laundry detergent from Ariel to Via and having to give Ariel a call and let them know you are switching. This is how it is with mortgages. In a market that is already struggling from a lack of competition, this barrier makes the market even less volatile. and in this way, the amortisation regulation represents a market failure.

The best mortgage rate paradox

Democratise mortgages

These challenges not only increase friction between consumers and mortgage lenders, but also add time, effort, and a lot of frustration. Since the amorteringsunderlag requirement came into force fewer people have switched mortgages. Consumers feel locked into one lender, not there by choice but rather by inconvenience.

The information required for an amortisation certificate is not complicated nor is it particularly sensitive. The only information that is really needed is when was the valuation of the property made and how much was the valuation for. This is not a banks data; this is our data as consumers. It’s time for us to own our own data!

When the practices of most major banks are failing us as consumers something needs to change. We want to make it easier for everyone to be able to get offers from different banks. So, we can get the service and the interest rates we deserve! We are working to not only improve mortgages but democratise them.

Our simple request is this: make the amortisation certificate easily available to us as consumers.

TL;DR:

One of the biggest challenges with mortgages is trying to figure out if what we are paying is fair. We don’t know what our neighbours pay or how big their deposit was etc. which makes judging our mortgages even harder. Moreover, due to a number of factors, in particular, the amortisation regulation that came into force in 2018, consumers are locked into their mortgage bank. This ultimately prevents competition in the market, which disadvantages consumers. 

A link to a version of the article in Swedish can be found here.

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