11 Nov 2014 16:21

Amortisation rules less aggressive than expected

Today Finansinspektionen, the Swedish Financial Supervision Authority (FSA), presented its new regulations for paying down principals on mortgage loans. The regulations are largely in line with the recommendation from the Swedish Bankers' Association, which was later revoked after criticism from the Swedish Competition Authorities.

As expected mortgage loans with loans to values (LTVs) above 50 per cent should be paid down, which is 20 percentage points below an earlier recommendation from the Swedish Bankers' Association that all loans with LTV above 70 per cent should amortise. The FSA have also specified that loans with LTVs above 70 per cent should be paid down by at least 2 per cent of the original loan per year, while loans with LTVs between 50-70 per cent should amortise 1 per cent of the original loan per year. If loans are paid down at this rate it will take 32 years to pay down the loan from a LTV of 85 per cent to a LTV of 50 per cent.

The recommended pace for amortisations is largely as expected, but loans with high LTVs are recommended to be amortised at a slightly higher pace than according to current regulation, while the recommended amortisations for LTVs between 50 per cent and 70 per cent are slightly lower than SEB’s economists predicted. Swedish FSA will now start working on detailed rules, which will take a few months. Issues to be solved are e.g. the definition of new loans and exemptions from rules for households with temporary cash flow problems such as unemployment or sickness.

The regulation will only apply to new loans, while SEB’s experts had expected the FSA would indicate that the new regulation gradually would apply also to old loans. This means that the regulation will affect household cash flow very gradually with the impact on total principal payments during the first year likely to be less than 1 billion kronor. If all households with LTVs above 50 per cent would amortise according to the new regulation annual principal payments would increase by around 7-10bn. With households' disposable income almost 2,000 billion kronor, the cash flow restriction on consumption is very small. The impact on the marginal house buyer is, however, significant and the new regulation is likely to cool the currently accelerating Swedish housing market and dampen lending growth to households (5.6 per cent year-on-year in October) as well as covered bond supply. According to estimates from the FSA, house prices can be expected to decline by 5 per cent due to the new regulation. SEB’s economists however believe the regulations are unlikely to lead to declining prices, but the current acceleration is likely to be offset.