What is amortisation regulation and why is it important for lenders?
Financing for home buying has long been a huge part of the economy. In Sweden, the residential mortgage lending market is currently estimated at SEK 4.3 billion with thousands of homes bought and sold every year.
However, mortgage lending is also one of the strictest areas of financial scrutiny. As if the decision of where to live is not difficult enough, complex mortgage lending processes and difficult regulations make home buying that much more difficult. Buying, selling, and refinancing debt on a house are some of the most stressful decisions a person will have to make.
What is amorteringsunderlag?
Many regulations such as FFFS 2016:16 have come into effect over the years to try and protect lenders and consumers alike. A specific part of this was introducing an amortization loan basis known as the “Amorteringsunderlag”. The amorteringsunderlag itself is just a document which contains details on the value of a person’s current residence, loan amounts, and existing amortization rates and how they were calculated. But its purpose is much bigger.
The amorteringsunderlag exists to ensure consumers do not obtain mortgages on properties that are above their budget by placing restrictions on how much they can borrow relative to house prices. Under the regulation, borrowers cannot borrow more than 85% of the value of the property and must have ample salary left to live on after re-payments are made (borrowing limits are typically 4x annual salary). Amorteringsunderlag was introduced as an important tool for reducing indebtedness and while there have been some benefits, it is currently not working as well as hoped.
What are the benefits of amortisation regulation?
One of the great benefits of the amortisation regulation is that it has helped solve one of the problems it went out to face: indebtedness. Since the 2016:16 amortisation regulation came into effect from June 1, 2016, levels of debt relative to income have decreased in Sweden. In this regard, Amorterings regulation has been good for consumers, helping home buyers to manage debt and to ensure loan-to-value (LTV) ratios are kept under control. The amortisation regulation limits how often a person can re-value their home (every 5 years) which has helped to create a more stable marketplace for buying and selling property by preventing big swings in repayment schedules.
What are some of the challenges?
One of the biggest challenges of current amortisation regulation rules lies with the amorteringsunderlag document – it is incredibly difficult to obtain. To get an amorteringsunderlag certificate, a borrower must get in contact with their existing bank, likely involving a physical meeting, and then must 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.
To get one, almost all the most popular banks require you to call them, with the sole exception of SBAB, the only bank where consumers can digitally download the amortisation basis. All other banks are far from easy. A quick search on the SEB website, for example, shows you need to contact the bank to order an amortisation basis. Others such as Nordea or Swedbank do not have any information on their websites at all.
It is not an optional document – all banks require this certificate before taking over a mortgage and use it to evaluate how the previous bank decided on the amortisation terms and what percentage of amortisation payments should be made. This inaccessibility poses many challenges for home buyers.
Regulation at the cost of transparency
Another challenge is data transparency. The amorteringsunderlag gives a clear example of how regulation has reduced competition in the marketplace. How? Once a borrower requests an amorteringsunderlag from their bank it is highly likely that the same bank will come back and offer the borrower better rates than they currently have, in a bid to get the customer to stay and not switch providers. Consumers are more likely to be persuaded with these better rates to avoid the hassle that goes along with switching, reducing mobility in the banking world. The bank has all the information while the consumer has none.
These challenges increase friction between consumers and mortgage lenders, 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.
What does the future of mortgage lending look like?
It is worrisome that banks in the mortgage arena seem to be going against societal trends of transparency and digitalization. Banks are reducing the ability for choice and convenience that consumers so desperately crave by cumbersome and frankly, outdated, processes. If mortgage lenders do not match the needs of today’s customers, it makes for a challenging tomorrow.
It is not from lack of trying – many new FinTech companies with heavy investment backing have tried in recent years but later failed – partly due to the difficult nature of amortisation requirements and partly due to the lack of data transparency enjoyed by other sectors.
A great step for the future of the industry would be to embrace digitalization. Allowing customers to download a digital standardized amortization basis from all banks would make a good start in making the mortgage lending process a better user experience. SBAB has shown it is possible to create a digitised lending platform and it is not a stretch to hope that others will follow suit. In an ever-increasing digital world, it may be worthwhile for banks and lenders, new or old, to take heed.
TL;DR
The amortisation basis was implemented to protect the stability of the Swedish economy by preventing consumers from borrowing more than they could afford. Since the regulation came into effect levels of indebtedness relative to income have decreased. However, the regulation has also decreased competition in the mortgage market and increases friction between consumers and banks. The amortisation basis locks people into one bank, meaning they are not there by choice but rather by inconvenience.
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