In the agency’s Swedish Mortgage Market 2022 Report, the authority, known in Swedish as Finansinspektionen (FI), reported that an increasing number of new borrowers had taken out large mortgages in relation to their income.
“Households with high debt ratios are particularly sensitive to rising interest rates, said Henrik Braconier, the authority’s chief economist.
As interest rates rise, FI also warned that house prices might fall.
“Now we can have a shift in the underlying factors that could affect housing prices downwards, potentially quite sharply downwards,” Erik Thedéen, the authority’s director-general, said at a press conference.
A decline in housing prices may not be entirely negative, Thedéen added.
“The best thing in this situation would be if we got a certain dampening of prices,” he said. “What we do not want to see is a crash.”
Mortgage rates could rise from 1.5 percent today to 3 percent next year, and 3.9 percent by spring 2024, according to an example calculation provided by the agency, TT reported.
While this increase might seem insignificant to long-time mortgage holders, Thedéen noted that for recent borrowers, “this means more than doubling your interest costs.”
In addition to providing examples of how interest rates could rise over the next two years, the survey also included predictions of how housing prices may change based on the interest rate.
In one scenario, assuming a 1 percent increase in interest rates this year and a 0.5 percent increase in 2023, there would be a small reduction in the price of apartments through a share in a cooperate — called bostadsrätter in Sweden, but a 10 percent fall in the price of detached houses prices.
In another prediction that accounted for rising electricity prices and a decline in new housing purchases, the price of bostadsrätter and detached houses risks falling by an average of 30 percent.
The proportion of home buyers with a large loan-to-income ratio is on the rise, the survey found, with new borrowers taking out loans 12 percent larger than the loans disbursed in 2020. Simultaneously, the average gross debt ratio has risen from 307 percent to 327 percent, the highest level since the survey began.
And while households may be able to absorb rising mortgage costs, the risk of other financial setbacks poses a risk to borrowers’ abilities to repay loans.
“Large debts would also mean a higher sensitivity if you were to suffer unemployment during an extensive recession,” Braconier said.
In order to support mortgage holders through this period, FI will explore increased opportunities for borrowers to end their mortgages early. TT reported that Thedéen said the agency had sent a request to the government to change the calculation model for how banks are compensated when mortgages are terminated before term.
“When you terminate a loan agreement and the bank incurs costs, it must be reimbursed,” Thedéen said. “But at present the banks are overcompensated, that is what our calculations show. If the government follows our line and changes the model and follows our line, then the banks must simply adapt.”