One issue that shines with its absence when the political parties debate and post their election promises is the question of the Swedes’ debts and, above all, mortgage loans and repayment requirements. At the same time, household indebtedness is an important issue that both the Riksbank and Finansinspektionen overlook. There have also been warnings on several occasions that we will risk problems in the future if we do not address these problems fairly soon.
At the beginning of the year, the Governor of the BC has already issued warnings that we must review the housing market and make major changes to overcome the problems with debt. He is not alone in being nervous about what it looks like in Sweden today and many experts agree that we need to use fairly tough means to improve the situation. For example, there may be limited interest deductions on mortgage interest rates or increased property tax.
Mortgage rate on a mortgage is a problem
One of the more important points is the rate of mortgage repayment. Today, only about 40% of households actually repay their mortgages in some form (and then those who repay relatively little are also included). The rest, the majority of Swedes, choose not to pay off their mortgages at all.
In Sweden, we have a relatively long repayment period on mortgages. A typical mortgage has around 50 years maturity, which can be compared to what it looks like in other European countries. Finland has an average of 30 years and Germany, France, Spain and Italy usually have an amortization period of 20 – 30 years. Norway has on average around 22 – 23 years. This means that we are well above the average in Sweden and this is one thing that should be reviewed according to most experts.
Amortization requirements going forward
Part two of it all is precisely that so many do not repay their mortgages at all. There is a lot of talk about introducing a repayment requirement so that you always have to pay off your loan. The advantage of this is of course that you slowly but surely get a smaller loan and that you then get a lower interest rate over time, but the disadvantage you can say is that there will be more to pay each month initially (then remember that the repayment in itself should be seen as an investment and not a pure cost).
Thus, both the Riksbank and FI are currently investigating how it should work with compulsory amortization and it is conceivable that it will become relevant in the not too distant future. But this is of course something that would affect Swedish households. An amortization requirement would mean that each month you have both amortization and interest expense to pay in, instead of just the interest rate that many have today. In addition, if shorter maturities of the mortgages are involved, so that it is down to 30 years instead of the usual 50 years, there will also be higher costs for this reason.
Amortization requirements in practice
With a calculation example where you have a mortgage loan of USD 2 million (and today’s low interest rate of 2 percent), the repayment would be about USD 5,556 a month if you have a repayment period of 30 years, compared with about USD 3,334 if the repayment period had instead been 50 year. Of course, this means a painful increase for those who do not really have the margins in their finances. But it also means that interest costs would become lower over time.
When you have a mortgage loan of USD 2 million, the interest rate will be around USD 3 330 – after tax deduction it will end up at around USD 2 330 instead. If you choose not to repay your mortgage, the interest rate will always remain at the same level. You pay USD 2,330 every month, year in and year out. It does not decrease because you do not repay.
If you had instead chosen to repay with a repayment period of 30 years, after 10 years you would have been down to about USD 1,550 in interest cost each month. This is a pretty big difference. After these 10 years, the annual interest cost is as much as USD 9,360 lower if you have chosen to repay compared to if you have not repaid at all. So you save quite a bit of money at the same time as you have reduced your mortgage and thus your risk.
In case the interest rate would go up
Today, the interest rate is very low. Around 2 percent or even lower than that, depending on how well you managed to bargain. Our examples above were calculated with a 2 per cent mortgage rate, but you cannot expect the interest rate to remain at these low levels, especially for many years to come. If you would instead receive an interest rate of 5 percent, it will clearly be more expensive to pay on the mortgage.
Then you would have had about USD 5,830 in interest if you chose not to repay your loan compared to USD 2,330. The difference there is USD 3,500 a month and in one year it is USD 42,000. Imagine having to pay USD 3,500 more each month for your mortgage loan, it does not sound directly attractive and many households in the country also do not have room for such increases in monthly costs.
One point of demanding repayment already is that people want to avoid people sitting with too large mortgages and too high interest costs when interest rates start to rise. When you end up in such a situation, many people do not have sufficient finances to support their loans and then it starts to get serious. As I said, it will be a little more expensive monthly cost today if you introduce the amortization requirement and reduce the amortization period to about 30 years, but this reduces the risk of future problems a lot.
There is currently no clear message on how to deal with all existing mortgages – whether these should be included in the repayment requirements or whether it should only apply to new mortgages. This is something to be discussed further. Regardless, you should be prepared that there may be a demand for amortization in the near future as both the Riksbank, FI and the government consider this to be an important development. If you have a mortgage today you may not be affected, but it is not a stupid idea to still choose to repay.