The triumphs and fails of the Swedish mortgage market
Household debt in Sweden has been rising for many years. By itself, this is not a problem. However, when household debt rises higher than disposable income, this can quickly spell trouble for individuals who cannot make loan repayments.
Furthermore, it puts the economy at risk. We do not need another financial crisis like those in the 90s and 00s to be reminded of what happens when there are mass loan defaults in a market. As loan-to-income rates have been steadily rising and increasing the risk to the economy, there have been several new regulations introduced in recent years. Sweden’s Household Debt reached 4.3 Trillion SEK in June 2020 which is not far off the GDP of the entire country at 4.9 Trillion SEK – as such it is only right to pay great scrutiny to the mortgage lending industry.
So, what exactly are the regulations that have come into play in the past ten years and more importantly, have they worked?
The Swedish mortgage markets need for the amortisation regulation
Since the earlier crises, many individuals have found themselves with high monthly mortgage payments to be made relative to their disposable income. This number has been on the rise in recent years too – particularly for new homeowners. Interest and amortisation payments, for individuals, are very high, which presents a significant risk for household financial stability should something change (for example, a job loss, illness or injury).
The level of personal debt to income is exceptionally high in Sweden and other Nordic countries relative to the rest of the word. One of the main reasons for this is the rapid rise in house prices in recent years, particularly in cities, due to population growth and a lack of new supply. Consistently high priced housing and high LTVs both lead to unstable situations because buyers are stretching themselves to get a house they can’t afford.
So, to mitigate these risks, the Financial Supervisory Authority [in Sweden, the Finansinspektionen, FI] took several measures to regulate the residential mortgage industry. This included introducing a mortgage cap in 2010, followed by a much more comprehensive introduction of an amortisation requirement in June 2016.
The amortisation requirement for Swedish mortgages
The new amortisation requirement introduced in 2016 [FFFS 2016:16] aims to reduce indebtedness across Sweden by placing a limit on debt-to-income borrowing levels. According to the new regulation, mortgages must be amortised under the following conditions. If loan-to-value (LTV) ratios exceed 50% and a household borrows more than 50 per cent of the residential property’s value must amortise at least 1 per cent of their mortgage a year, while households borrowing more than 70 per cent must amortise at least 2 per cent a year.
This amortisation requirement applies to all new loans for residential properties. So affects lenders and banks providing the loans, as well as, buyers purchasing or refinancing a home after 1 June 2016. Additionally, properties can only be revalued every five years, not every year as was allowed previously.
The 2016:16 regulation also introduced stricter documentation requirements for borrowers, including obtaining an amorteringsunderlag whenever you choose to switch lenders.
To further strengthen household resilience, FI introduced a stricter amortisation requirement two years later, which came into effect on 1 March 2018. The amendment says that households borrowing more than 4.5 times their annual income before tax must now amortise an additional 1 per cent of their mortgage a year, on top of the previous requirements.
Just how effective have these new regulations been? On the financial risk side, the results have been reasonably positive. Research and analysis by FI show that since the introduction of the new regulation, households with new mortgages are better able to make payments on their mortgage and weather rising interest rates and unemployment. In short, they are much more resilient because of the policies in place to ensure they borrow within their means.
The research also shows that households with mortgages subject to the new amortisation regulations are borrowing less and are buying cheaper houses than they would have done without the requirements.
This is excellent news – the new regulations have had a substantial impact on creating a more stable economy and ensuring households don’t take on too much risk. It is beneficial for banks, too – better household resilience means banks will experience fewer mortgage defaults.
There are of course some significant drawbacks, though. The amortisation requirement has arguably reduced competition in the marketplace by making it even more difficult for people to switch mortgage providers. This is partly due to the difficulty of obtaining the correct documentation. To get the amorteringsunderlag (all but one of the biggest mortgage banks) requires you to call or visit the bank in person – a vastly outdated possess in today’s digital world. Moreover, most banks will try and convince you to stay when you request it because they know you are looking to switch. This hardly seems to indicate a fair marketplace.
Policies such as the amortisation regulation have made it incredibly difficult for borrowers to switch providers, which comes as a massive blow to the Swedish economy since it makes it near impossible for new or challenger banks to enter the scene. Unless high-street banks adopt digitalisation and make processes more transparent, this will continue to stifle growth.
The 2016:16 was not the first mortgage regulation and nor is it likely to be the last. While the signs are good that the new amortisation regulations contribute to solving rising debt-to-income levels – this must be balanced with the drawbacks of a lack of transparency and mobility in the marketplace.
With great care, the FI must balance stability with progress when it comes to future lending regulations. While there are still some kinks to work out, banks’ improvements and adoption of digitalisation can ensure that mortgage lending regulations can benefit both borrowers and lenders for a long time to come.
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