Sweden’s Mortgage Rules Review Proposes Higher Loan Cap, Eased Amortization

Nov. 04, 2024

Key proposals include raising the mortgage cap from 85% to 90%, easing amortization requirements, and introducing a new loan-to-income cap. The committee emphasizes a cautious, phased approach to prevent potential overheating in the housing market.

A committee commissioned by the finance ministry recommends adjusting Sweden’s mortgage regulations to improve housing affordability and support financial stability. The proposed changes aim to ease financial strain on households, especially for first-time buyers, while curbing debt-driven housing risks. Read an interview with Peter Englund, Swedish House of Finance researcher and chair of the committee below:

What were the committee’s main findings? 

The current regulations consist of a cap on the loan-to-value ratio of all new mortgages and minimum amortization requirements. We find that both have been effective in reducing new mortgage loans. But the effect on financial stability is unclear, since they put a strain on household financial buffers and encourage more expensive consumption loans. The extent of this offsetting effect is hard to measure due to the lack of data. Furthermore, amortization requirements reduce cash-flow margins, thereby making households more vulnerable to disturbances. We conclude that the benefits to financial stability are unclear.

The welfare costs of the regulations, on the other hand, are clear. The regulations limit the ability of households to smooth consumption over the life cycle and increase the threshold for first-time home buyers.

What specific changes to existing regulations is the committee recommending, and what is the rationale behind these recommendations? 

Given that the benefits of current regulations are unclear and that the welfare costs are obvious, we propose to increase the mortgage cap from 85% to 90%, and to reduce the amortization requirement to one percent per year for mortgages with a loan-to-value ratio of more than 50%.  

Further, we propose a new regulation that puts a cap on the loan-to-income ratio at 550%, meaning that borrowers could take out a mortgage up to 5.5 times their annual income. This is meant to act as a backstop against a debt-driven house-price boom.

The committee has also been tasked look into amortization requirements on the portfolio level. What are the advantages and disadvantages of requiring amortization requirements for individual loans rather than an institution’s entire credit portfolio? 

Regulating each individual loan is less flexible. This is particularly problematic for the loan-to-income cap, since current income may be a poor indicator of the borrower’s ability to service a loan. Looking at the portfolio of all new loans is more flexible and allows the banks to account for individual circumstances. We propose to exempt 10% of new loans from the loan-to-income cap.

What problems do you see in implementing the changes that you recommend? 

From historical experience, we know that rapid deregulation may trigger a lending and house price boom, in worst case followed by a financial crisis, as in Sweden in the late 1990s or Denmark in the 2000s. We regard our proposal as a package, where the loan-to-income cap should act as a backstop against such a development. Furthermore, we propose to make the reduction of the amortization requirement in two steps, which would allow evaluating the effects of the first step before going further.