Financial authority confirms mortgage cap

The Financial Supervisory Authority (Finansinspektionen - FI) announced on Friday that it will implement new guidelines limiting new mortgages to a maximum of 85 percent of the home's market value.

Financial authority confirms mortgage cap
Photo: Bertil Ericson/Scanpix

The new rules will go into effect on October 1st.

In Sweden, mortgages represent the largest portion of total indebtedness among households. The move is designed to increase consumer protection and suppress an unhealthy development on the credit market, FI said in a statement.

“We are now imposing a limit of 85 percent for new loans. One of the reasons is that we have had extremely strong growth in lending in recent years, which has continued to rise through the crisis,” said Martin Andersson, FI’s director general.

“There is also a risk that banks are using increasingly higher mortgage rates that are competitive and we want to avoid putting households at risk. This is a regulation that will protect the most vulnerable, while the vast majority are not affected,” he added.

The rules aim to counteract the use of higher loan-to-value ratios by banks and other credit institutions as a means of competition. Overly high indebtedness means that households are less equipped to handle fluctuations in the housing market and the economy.

The new guidelines hope to increase household incentives to limit debt and better protect themselves financially for the future. FI believes that the rules will not have any significant price effects on the housing market.

Critics have argued that the mortgage ceiling can have large price effects on the housing market. However, FI does not share that assessment.

“There will be a higher interest cost, that is clear,” said Lars Frisell, FI’s chief economist. “However, we believe that the effects are extremely limited, both in terms of interest and price.”

Criticism has also been directed at the price ceiling that keeps young households out of the housing market in large cities.

“They are the most affected,” said Frisell. “However, they are also the ones we want to protect. The housing shortage in big cities is not remedied by the fact that mortgage rates are rising.”

One critic is the National Debt Office (Riksgälden) and its chief economist, Lars Hörngren. He believes the size of household loans is the greatest concern, not the size of the mortgage.

“We believe that the fundamental problem is debt, not mortgage,” he said. “It is a difficult problem to address and it will not be solved by this measure, “says Hörngren. “Some perhaps will borrow less, but others will borrow just as much and will have to pay more. The impact on consumer protection is unclear so far.”

The new rules only apply to new loans or extensions to existing loans that use the home as collateral. The reissuance of existing loans or new credit to replace previous loans issued by another company are not subject to the rules as long as the total credit is not extended.

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Moderate party’s mortgage pledge ‘would harm Sweden’: Riksbank chief

The head of Sweden's central bank, the Riksbank, has warned that suspending rules forcing banks to demand mortgage repayments from borrowers -- something pledged by the parties forming Sweden's next government -- would be "damaging for Sweden".

Moderate party's mortgage pledge 'would harm Sweden': Riksbank chief

All four of the parties backing Moderate leader Ulf Kristersson as Sweden’s next prime minister said in the run up to September’s election that they would either suspend or reduce the so-called “amortisation requirement” once in government. 

But in an interview with the Aftonbladet newspaper, Stefan Ingves, who steps down as the bank’s governor at the end of this year, said that the measure would be poor economic policy in the current inflationary situation. 

“This is an inappropriate measure which would harm Sweden if you did it,” he said. “You’ve got to understand that we have enormous amounts of mortgage debt in the Swedish economy and that the mortgage market represents a risk for the economy.” 

“It would send an extremely unfortunate signal to say that as soon as it gets a bit more expensive to borrow, then you should stop amortising [paying off the interest],” he said.

Ingves’s statement came as Erik Thedéen, the general director of Sweden’s Financial Supervisory Authority, also criticised the proposal. 

“To use the amortisation tool in the same direction as during the pandemic would quite simply be a wrong measure,” he told Sweden’s state broadcaster SR in its regular Saturday interview

He said that if the new government wanted to help those who risk personal bankruptcy as a result of rising interest rates, there were much better ways of doing. 

“Only half of households have mortgages, and they typically have fairly strong finances,” he said. “So if we want to help those with the tightest margins, then this is an extremely poor measure, when there are a lot of better measures you could come up with when it comes to finance policy.”