Maria Lindholm, who with her partner is buying an apartment in Stockholm’s Soedermalm district, said they’ll probably opt for the riskiest variable-rate loan to cover part of the sale price. The mortgage cost resets every three months based on the direction of interest rates.
“We’re counting on mortgage rates to remain low,” said Lindholm, a 39-year-old magazine editor and mother of three.
Swedes like Lindholm are flocking to three-month floating-rate mortgages as inflation falls, increasing pressure on the Riksbank to cut borrowing costs. In May, 77 percent of all new home loans in Sweden had three-month variable rates, up from 63 percent in 2012 and the highest in almost four years, according to state-owned lender SBAB. The dominance of these mortgages at a time when households are burdened with record debt makes the economy more vulnerable to a shock if interest rates rise.
“Almost all households have short-term mortgage rates today and the interest-rate risk is therefore huge,” said Bengt Hansson, an analyst at the National Board of Housing, Building and Planning. “There is no cushion or shock damper to indebted households should interest rates increase.”
The 1.25 percentage-point decline in the central bank’s key rate since late 2011 has drawn Swedes to the three-month variable-rate loans. The central bank is projected to deliver a quarter-point rate cut in July to 0.5 percent, according to economists at Nordea Bank AB, Swedbank AB, SEB AB and Svenska Handelsbanken AB. Inflation has remained below the central bank’s 2 percent target since early 2012.
Consumer prices fell an annual 0.2 percent in May, declining for a fifth month. Banks including SEB and Swedbank today reiterated their forecasts for a rate cut in July.
Sweden’s declining borrowing costs means short-term mortgages are the cheapest. The rates for three-month loans averaged 2.67 percent in May compared with 2.73 percent for an adjustable mortgage with a rate fixed for two years and 3.46 percent for a five-year contract, according to data from SBAB.
The number of new adjustable mortgages with fixed rates from 12 months to four years fell to 22 percent of all home loans in May from 28 percent in March. The average maturity on a new home loan declined to 8 months in May from 10 months in March, according to SBAB.
“The mortgage clients continue to reduce their rate maturities, which is the same thing as taking more and more rate risks,” Tor Borg, an economist at SBAB, said in a report on June 3. “Potential rate changes will therefore hit harder than before, both on the upside and the downside.”
Lindholm’s 112 square-meter (1,206 square-feet) apartment is located in the neighborhood surrounding the Mosebacke hill, home to computer hacker Lisbeth Salander, a fictional character in Stieg Larsson’s novel “The Girl With the Dragon Tattoo.” The hill offers views over the church spires and the Royal Castle of the Swedish capital’s medieval Old Town, which is situated where the waters of Lake Maelaren meet the Baltic Sea.
Lindholm said she’s aware of the risks with three-month loans, which became popular in Sweden in the late 1990s. While her family has enough income to handle the cost of a rate increase without dipping into savings, Lindholm said: “It is of course always risky to take a big loan.”
A longer-term loan, which Lindholm may also use to pay for part of the apartment, would give the couple better control over their expenses, she said.
In neighboring Denmark, adjustable-rate mortgages have ballooned to make up more than 70 percent of the country’s $550 billion home-loan market since first appearing in 1996. They have sparked concern among policy makers about their impact on the economy once rates start to rise. The Danish central bank, rating companies and the Organization for Economic Cooperation and Development have all deemed them risky to the economy.
Rising Debt Loads
Sweden’s Riksbank said last month that private debt is higher than it had projected, with homeowners owing an average 370 percent of their disposable incomes. The average indebtedness of all Swedes has almost doubled since 1995 and now stands at an all-time high of about 175 percent of disposable incomes. The central bank forecasts it to increase to 180 percent by 2016.
Sweden’s rising home prices have helped push household debt to record levels. Swedish apartment prices gained an annual 8 percent in April while costs for single-family homes jumped 6 percent, according to data from Svensk Maeklarstatistik AB, a company run by real estate brokers.
The Swedish Financial Supervisory Authority said last year that three-month mortgages would be a “risk factor” in times of severe economic stress because they make indebted households more sensitive to rate changes.
Martin Andersson, the director-general of the Stockholm-based financial regulator, said in an interview today that “there is of course a vulnerability” related to households’ increasing use of variable-rate mortgages.
“It fuels this situation that we’re having relatively much financial risk in the households,” Andersson said.
While adding to homeowners’ sensitivity to rate increases, Swedes currently have big enough financial buffers to cope with rate increases of as much as 5 percentage points, Henrik Braconier, the chief economist at the authority, said.
“While households need margins for a scenario where rates increase or economic conditions change, we see that households have margins for significant rate increases,” he said.
Braconier said the authority sees no need to consider any regulation on three-month mortgages at the moment.
Hansson, the national board of housing analyst, said the authority and the Swedish government should be more concerned about the increasing popularity of these mortgages.
With the average rate on new three-month mortgages at 2.4 percent in April, a “mere 1 percentage point increase in interest rates would increase interest payments by more than 40 percent,” Hansson said. For a household with a 3 million krona ($449,000) mortgage, such a rate boost would increase the monthly interest cost to 8,500 kronor from 6,000 kronor.
“Households and policy makers have every right to be concerned,” Hansson said.
Since 2010, the Swedish financial regulator has taken steps to stem the increase in household indebtedness and soaring home prices. It introduced a cap on the size of mortgages, raised capital requirements for Swedish banks, increased the risk weights they must apply to their mortgage assets and encouraged more amortization on loans.
The Riksbank in a report on June 4 called for further measures to curb the build-up in household debt. The central bank, led by Riksbank Governor Stefan Ingves, said that the financial watchdog should set minimum standards for the credit assessments of borrowers.
“The indebtedness of the Swedish households is currently the greatest domestic risk,” the Stockholm-based bank said in the report. “If it proves to be the case that the rate of increase in housing prices and household debt continues to pick up speed, it will become even more urgent to consider additional measures to slow down the build-up of risk.”
Jens Magnusson, an economist at SEB, said short-term mortgages add to the vulnerability of households. He said Swedes should increase their savings and pay down their debts rather than boost consumption during this period of low interest rates.
“It’s important that both banks and authorities are clear with the fact that today’s low rates won’t last forever,” said Magnusson. “Critical for how well households will cope with future rate hikes is how they act today, while rates are still low.”