Review of Sweden’s Macroprudential Regulations

Dec. 05, 2023

Faced with higher interest rates and inflation, many Swedish households face mounting living costs, prompting the Swedish government to rethink their mortgage repayment rules and other macroprudential policies.

This spring, the Swedish finance ministry commissioned a committee, chaired by Swedish House of Finance’s Peter Englund, to analyze how measures such as mortgage ceilings and amortization requirements have worked so far, and how they can be redesigned to manage macroeconomic risks and consumer protection in an effective manner.

What are the committee’s main concerns?

Under current amortization rules, mortgage borrowers must repay 2% of their loans annually on loans that are larger than 70% of the value of the home, and 1% annually on loans larger than 50% of the value. In addition, an extra percentage point must be paid off annually by those that take out loans larger than 4.5 times their annual income.

The current regulations were implemented with the aim of restricting individuals' home loan debts, mitigating the risk of excessive debt in relation to their home values or incomes. The task of the committee is twofold: to evaluate the current measures and to make proposals for the future.

“This involves weighing the possible benefits in terms of improved financial stability against the costs in terms of limiting the ability of household to financed consumption and housing investments,” Englund says. “Young households with limited financial resources risk being locked out from the housing market.” 

What suggestions have been brought up?

There are various ways in which the current regulations can be tweaked, Englund says.

For instance, instead of limiting how much money someone can borrow based on the value of the home, this limit can be tied to a person's income.

Another way is to tie the regulation to the models bank use for credit evaluations. These models typically test if a household could handle a significant increase in interest rates without drastically reducing their spending. The interest rate applied in these calculations could be regulated, Englund says.

“In general, more flexible rules should be beneficial. Instead of putting a strict limit on each borrower, the banks may be allowed to make exceptions from the limit for, say, 5% of all mortgages,” he adds.

What are the risks associated with tightening restrictions on the broader financial system and economy?

The most direct effect of tighter restrictions would probably be the dampening of the housing market.

“Fewer households would be able to finance a housing purchase,” Englund says. “And today this would come when the housing market is already depressed due to lower real wages and higher interest rates.”

The committee will finalize their investigations by October 31, 2024.