2023-07-05 16:40:07
When deciding whether potential homebuyers should be offered a mortgage, Swedish banks test applicants’ finances against a hypothetical interest rate or discount ratein order to see if they would still be able to pay back their loan if interest rates go up.
Over the past year, as the key interest rate has gone up, this discount rate has increased from around 5 to 6 percent to 7 percent at some banks, after advice from Sweden’s Financial Supervisory Authority to avoid homeowners taking on debts they can’t repay.
Danske Bank, which has raised its discount rate to 7 percent, told TT newswire that it is possible that this could increase even more this autumn.
“There are reasons to reassess this in the autumn, I think lots of banks will be doing so,” head of personal customers Anneli Adler told TT.
“It’s a way to help the customer, to make sure they’re not taking on debts which are too expensive.”
The previous 5-6 percent discount rate represented a sizeable buffer a year ago, when variable mortgage rates were around 1-2 percent. Now that variable mortgage rates are closer to 5 percent, this buffer is much smaller.
“We want to make sure our financing is something which customers can handle in the long run,” Adler said, although she admitted that this will make it harder for first-time buyers – like young people and newly-arrived immigrants – to break into the market.
“It’s really difficult for first-time buyers,” she said, “even despite the fact that house prices have gone down”.
The bank has also noticed the effects of homeowners’ strained finances, with fewer sales occurring and many putting off property purchases until the market is more stable.
“Many more customers than previously are requesting to pause their obligatory mortgage repayments,” she said. “We’re getting requests to do this every week, from normal customers, not just those who are worst off.”
Other major banks did not wish to comment when TT asked about future plans to tighten up mortgage requirements, but many others echoed Danske Bank’s observations that more customers are applying to pause their mortgage repayments.
In Sweden, you must pay off or amortise a certain percentage of your mortgage each year depending on how large your mortgage is in relation to the value of your home and in relation to your yearly income.
If your mortgage is less than 50 percent of the value of your home and less than 4.5 times your total yearly household income, you don’t have to repay your mortgage, although it is still advised to do so if you can.
In certain circumstances, you can apply to pause this amortisation requirement, if your finances have suddenly become worse due to a reason such as illness or losing your job.
Joel Holm, press spokesperson at Handelsbanken, told TT in a written comment that the most common reason for customers at their bank to apply to pause repayments is parental leave.
“If we approve an application to pause the obligatory repayment requirements, it’s due to the fact that the household is under financial stress. Maybe they’re applying for a temporary break due to parental leave, for example.”
FACTS AND FIGURES
According to Swedish law, banks should test whether there is “sufficient ability to repay the loan” before granting a mortgage, although no specific figure is set in stone.
Many banks use the Swedish Consumer Agency’s left to live on calculationor “left to live off-calculation”, also known as a kalp-kalkilwhich calculates how much is left each month after all fixed payments are made.
Here are the current discount rate amounts at the time of writing which customers must be able to afford if applying for mortgages at Sweden’s largest banks:
SBAB: 7 percent.
Danske Bank: 7 percent.
Nordea: 6.5 percent.
Handelsbanken: 7 percent.
Swedbank: 6.34 percent.
SEB: 6.5 percent.
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