In the media

The Swedish model for home mortgage is outdated

Lan-Ling Fredell

By Lan-Ling Fredell

09 September 2019


Read the full article in Swedish on

Why do we have a system in Sweden where the consumer is responsible for the entire interest rate risk in mortgage lending? Financial services expert Lan-Ling Fredell believes that the government should take responsibility for protecting consumers' financial assets.

Earlier this year, the Swedish Financial Supervisory Authority advised the consumers to renegotiate with the banks to lower their interest costs. The authority believes that the banks' already high margins on home mortgages reasonably provide consumers with bargaining space. In September, the Riksbank announced that the repo rate will be temporarily left unchanged due to households' high indebtedness but is expected to be raised towards the end of the year.

The question of the repo rate is of concern to consumers as 70 per cent of all mortgages in Sweden run at variable interest rates, and higher mortgage rates in combination with any falling property prices would hit a large number of Swedes, especially younger first-time buyers.

In the debate, there have been calls for consumers to invest in less expensive items. But that council is a small consolation for all the low-income earners who have already made their investment choices. Regardless of whether or not the low interest rates remain, the crucial issue is that the banks and not the individual should be responsible for the interest rate risk.

Looking at the banks' model as it stands, it’s not surprising that consumers to a large extent choose variable mortgage rates. If a mortgage borrower chooses a fixed interest rate, but then decides to sell his tenancy or his house before the end of the interest period, he may pay an interest rate difference fee to the bank. The fee corresponds to the difference between the current market interest rate and the interest rate when the loan was taken out. With fixed interest rates, mortgage borrowers also cannot reschedule their loans and take advantage of any falling mortgage rates without paying a special restructuring fee. In summary, it’s justified to question why we have a system in Sweden that places the entire interest rate risk with the consumer.

The linear repayment used in the Swedish mortgage model means that the total cost to the borrower is highest at the beginning of the loan. This is because the loan amount is amortized by a fixed amount each month. The interest rate thus falls over time as the amortization takes place. This is to the advantage of the banks as the credit quality of the loan then increases over time. On the other hand, it’s devastating for young people to enter the housing market for the first time.

A better alternative to today's systemwould be if the banks could offer fixed-rate loans for consumers without fees on early repayment.

The bank then stands for risk and cost in connection with interest rate hikes and interest rate cuts, which is fully reasonable and consistent with the bank's business concept, expertise and capital resources. Some banks in Sweden today offer this alternative for a high fee, which in combination with the linear repayment, makes the solution very unattractive.

Another better alternative is annuity loans with fixed interest rates and monthly payments that are known in advance and remain unchanged during the term of the loan. An annuity loan has a repayment model where the amount is the same every month, disproportionately divided by interest expense and amortization. In the first years, a larger proportion goes to interest and a smaller proportion to amortization. Over time, the proportion of amortization increases. This type of loan gives the borrower incentive to choose a fixed interest rate and  becomes more advantageous for first time buyers. In addition, annuity loans are already used in several foreign markets. The United States is one such market where the majority of homeowners choose annuity loans of 30 years with a fixed monthly cost and without the cost of converting loans or interest rate differentials.The loan model has been successfully applied since the 1930s when it was introduced by the US Department of Housing to alleviate the major depression.

From a political point of view, concerns have long been expressed about increased debt and rising housing prices. This has resulted in the new repayment requirements, which in turn can stabilise prices and increase the credit quality of high loans. But the new amortization requirements primarily address the high-income earner segment and not at all the risk of increased mortgage rates for all Swedish property owners and tenants with variable interest rates.

The government should prescribe a more pronounced responsibility to protect consumers' financial assets and welcome a review of new structures and models for the mortgage market. This is to create a healthier and more stable housing market. Instead of the current overheated housing market with ever-increasing debt burdens on households, banks should be encouraged to offer annuity loans and fixed-rate loans with no early repayment fees. Such a change is extensive and will take a long time. Therefore, it’shigh time to start now.

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