As house prices soared last year, the sum of Swedish home owners’ mortgages leapt to 2,721 billion kronor ($329 billion) in February, up 7.5 percent year-on-year, Sweden's number-crunching agency Statistics Sweden said.
As bubble fears mount, the Nordic country has taken steps to cool the market: a mortgage cap was introduced in 2010, compulsory mortgage repayments are in the works, infinite-term mortgages were ditched last week, and the government and opposition are in talks about slashing generous tax breaks for borrowers.
But with interest rates continuing to drop, lawmakers are facing an uphill battle. In February the average interest rate on new home loans fell 0.03 percentage points to 1.6 percent.
With the low rates enticing new buyers, Swedbank economist Arturo Arques is warning prospective home owners to avoid a false sense of security.
“The low interest rates make it easy to be lulled into the belief that household finances are better than they actually are,” he said in a statement.
Swedbank has presented criteria for sustainable finances for anyone thinking of entering the market. To stay afloat if rates rockets, buyers should hold they will still be able to save ten percent of their wages after tax, have savings in the bank equal to two-months’ salary after tax, and have the financial means to cope with a year’s loan costs after an unforeseen event like a divorce or the loss of a job.
“Our surveys show that households are very interest-rate sensitive and risk having to seriously tighten their belts in the event of rising interest rates,” said Arques.
Only 60 percent of home owners surveyed by Swedbank in 2015 were well-equipped for rising interest rates.
The bank’s calculations stipulate that a mortgage should not be more than six times higher than disposable income. It also factors in a seven-percent interest rate, and the abolition of interest deductions, the generous tax breaks that could be on their way out.
In the example below, a cautious borrower with a household income after tax of 26,534 kronor should not get a mortgage exceeding 1.35 million kronor, according to the new recommendations.
Table: Mortgage ceilings for cautious borrowers (kronor)
Household income after tax Maximum mortgage