Swedish Banks Tighten Amortization Rules to Stem Debt Growth

Sweden’s main bank association recommended lenders force more borrowers to pay down their home loans as regulators and the government are working on a “road map” for stricter rules to halt a buildup in consumer debt.

The Swedish Bankers’ Association will ask banks to force households to amortize on all mortgages that exceed 70 percent of their property’s value, from a previous level of 75 percent, the group said today in an op-ed in newspaper Dagens Nyheter.

“Many households do not build a necessary buffer for their mortgage and a more healthy credit culture needs to be created,” Thomas Oestros, head of the association, wrote.

Low rates over the past years and a limited housing supply have fueled a surge in home prices and pushed debt levels to records in the $550 billion economy. Officials are working on a set of rules that will span several years of regulation to get debt growth under control and lower financial risks. They have signaled they will present a plan in the spring.

The government, Financial Supervisory Authority and central bank have joined forces to try to stem household borrowing. Mortgages were capped at 85 percent of a property’s value in 2010 while the risk-weights banks must apply to their mortgages were tripled last year. Sweden has also imposed some of the world’s strictest capital requirements on its banks.

‘Right Step’

Finance Minister Anders Borg said the group’s new rules won’t change the road map he plans to present.

“The government, the FSA and the Riksbank and others must still act so that we gradually tighten rules, not least on capital requirements, in the coming years,” he said. “This is a good additional measure, but it is not a measure that will replace other measures.”

Riksbank Governor Stefan Ingves said today in Stockholm that the new guidelines are “definitely a step in the right direction” even as the level of amortization in Sweden is still lower than in many other countries. “One can always question” whether 70% is enough, he said.

While credit growth slowed to a 20-year low of 4.5 percent last year, it has since accelerated to more than 5 percent. Swedish apartment prices rose an annual 11 percent last year while prices of single-family homes climbed 5 percent, according to data from Svensk Maeklarstatistik.

140 Years

A report released last year by the FSA showed that at the current pace of amortization it would take households on average 140 years to repay their loans. Only 40 percent of borrowers with mortgages smaller than 75 percent of their property’s value actually pay down their debt, the report showed.

“A sign that there are problems in the housing market is that housing prices and household debt have increased at a pace that’s not sustainable in the long term,” Oestros wrote, adding that reasons for that development include little construction of new homes and population growth in large cities.

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