The era of cheap mortgages is at an end
Market Report
February 2012
Titel: The era of cheap mortgages is at an end, Market Report, February 2012
Published by: Sweden’s National Housing Credit Guarantee Board (BKN)
Author and contact person: Alexandra Leonhard, +46 (0)8-545 137 62
Co-Author: Bengt Hansson, Sebastian Johansson
Data gathering: Marie Rosberg
BKN’s Market Report February 2012
1 The two largest are the Danish state bankruptcy of 1813 and the global
depression of the 1930s.
Swedish mortgages have grown by almost 400 per cent
since 1990 and in 2011 amounted to over 120 per cent of
disposable income. In spite of the strong increase in
mortgage loan stock, interest rate costs as a proportion of
disposable income have actually fallen. As a result, the
interest burden is lower today than it was 15 years ago.
40
2
20
0
0
2010
4
2008
60
2006
6
2004
80
2002
8
2000
100
1998
10
1996
120
1994
12
per cent
Figure 1. Interest payments and
outstanding mortgages in Sweden
1992
This report compares the Swedish mortgage market with
the Danish and German markets. We have chosen these
markets because they operate differently to the Swedish
market and have a tradition of fixed interest rates, which
insure households against interest rate increases. The
Danish mortgage market is over 200 years old and despite
domestic and international financial crises1 has never
caused lenders any significant losses. It was nevertheless
decided that the market should be liberalised by
introducing loans with shorter fixed-rate periods as well
as non-amortising loans. We are therefore able to observe
the consequences of this, particularly as the new system
Low interest burden despite increased debt
1990
Debt owed by Swedish households grew by “only” just
over 5 per cent in 2011 and almost all of this increase can
be attributed to higher mortgages. Since 2001, household
debts have increased as a result of larger mortgages. On
average, mortgages increased by 12 per cent a year
between 2001 and 2011. Some Swedish households are
heavily in debt, making them sensitive to illness,
unemployment or a fall in house prices. Furthermore,
around half of the loan stock has been lent at variable
interest rates, which begs the question of whether households are carrying a worryingly large interest rate risk.
Households can insure against sudden large increases in
interest rates by fixing their rate. However, a fixed rate is
usually considerably more expensive than the variable
rate, which leads many to choose a variable interest rate.
But does a fixed mortgage interest rate have to be more
expensive than a variable one? Are there mortgage
markets in other countries that are able to offer households more favourable conditions for longer fixed-interest
periods on mortgages?
bears a greater resemblance to the Swedish system, with
short fixed-rate periods and variable interest rates. In
Germany, on the other hand, the old system of long fixedrate periods is still in place, and the overall cost of a fixedrate mortgage is often lower than a variable-rate mortgage.
In Denmark, households with 30-year fixed-rate
mortgages are able to repay them early without paying
any interest differential compensation. In Germany and
Sweden, on the other hand, a charge is payable for
repaying a mortgage early. In Sweden this cost is linked to
the government borrowing rate, which can be called into
question, since this has fallen by more than the interest
rate on mortgage bonds in recent times. The current
system is also asymmetrical in the sense that if the interest
differential were negative at the time of early repayment,
the borrower would not receive money back from the
bank. This shows that interest differential compensation is
structured in a way that suits the banks rather than the
customers.
per cent
The variable mortgage rate in Sweden rose during autumn
2011 and mortgage customers were advised to change
banks if they were unhappy with their interest rate. When
the Riksbank cut its base rate in December, many banks
chose to leave the recently increased interest rate on
variable mortgages unchanged, although following some
pressure they did reduce it, albeit by less than the
Riksbank’s 25 points. Public debt concerns in Europe have
put pressure on the banking sector (including in Sweden),
which at the same time has seen new rules introduced
requiring it to increase equity and liquidity. This costs
money and someone has to pay for it. Can Swedish
households expect variable mortgage rates to remain low
in the future?
3
Interest payment after tax/disposable income
Mortgages/disposable income (right axis)
Source: Statistics Sweden (Savings barometer and National accounts)
If we compare interest payments in Sweden with those in
Denmark, we can see that they are higher in Denmark.
This can be explained by the fact that mortgages
4
BKN’s Market Report February 2012
represent a much larger proportion of disposable income
in Denmark, where they amounted to over 240 per cent
of disposable income in 2009.
250
10
9
200
8
7
150
6
5
100
4
3
50
2
1
0
2003
2005
Interest pay. DK
Mortgages DK
2007
2009
Interest pay. SE
Mortgages SE
2011*
0
Outstanding mortgages per cent
of disposable income
Interest payments per cent of
disposable income
Figure 2. Interest payments and
outstanding mortgages
Interest pay. DE
Mortgages DE
*) Forecast
Sources: Statistics Denmark, Deutsche Bundesbank, Eurostat and
Statistics Sweden
The interest payments in Denmark and Sweden correspond to interest
payments after tax since they are tax deductible here, which is not the
case in Germany. This makes it possible to compare the households’
actual interest payments.
The reason for the increased interest burden in Denmark
is that from 2003 lenders were permitted to offer loans
without a requirement for amortisation2. In addition,
interest rates fell and for a short time it became more
advantageous to have a variable-rate loan instead of the
traditional mortgage with a 30-year fixed-rate period.
Many people refinanced their old loans with new variable
ones.
In Germany, in contrast, loans are falling as a proportion
of disposable income. This can be explained by the fact
that the banks require amortisation and significantly
higher deposits before they will approve a loan to a
household to purchase a house or flat. There is also a
cultural aversion to taking on debt, which may also be
linked to the fact that interest payments are not
tax-deductible.
years, as they do in Denmark and Sweden. In Sweden and
Denmark, interest payments have fluctuated as the base
rate has risen and fallen, since a large proportion of mortgages are financed with a variable interest rate. Figure 3
shows that only a fraction of German mortgages have a
variable interest rate. The high level of debt in Denmark
means that interest payments represent a larger proportion of disposable income in Denmark compared to
Sweden. The reasons for the strong increase in borrowing
in Denmark are the previously mentioned non-amortising
loans, aggressive lending from the banks and an increase in
house prices (it feels less risky to borrow if the value of
your house has gone up). Non-amortisation meant that
household borrowing costs (amortisation plus interest)
fell despite the fact that interest rates rose.
Cost of variable versus fixed interest in Sweden,
Denmark and Germany
Today, 51 per cent of household mortgages in Sweden are
financed with a 3-month interest rate, which is classed as
a variable interest rate3. This proportion has fallen sharply
during the last two years. At the beginning of 2010,
almost 70 per cent of the mortgage loan stock was
financed with a variable interest rate. Although the
proportion of variable-rate loans has fallen, this means
that in spite of everything, half of all mortgages are
associated with interest rate risk. The Riksbank is forecasting a repo rate of 3 per cent by the end of 20144. If we
assume that the banks’ margins, which right now are
around 2.6 percentage points (February 2012), remain
constant, the mortgage interest rate will reach
approximately 5.6 per cent. Such a high mortgage interest
rate has only been observed a few times since 1996. The
last time this happened was for a few months at the beginning of autumn 2008, when the variable mortgage rate
reached levels of around 6 per cent. Mortgage rates and
the global financial crisis had an impact on house prices,
which fell by 6.2 per cent between June 2008 and January
2009. This demonstrates how sensitive Swedish households are to interest rate increases.
In Germany only half a per cent of mortgage borrowers
Interest payments as a proportion of disposable income
have fallen in Germany. They also do not vary over the
2 See market report of BKN (Swedish National Housing Credit Guarantee
Board), “Kortsiktiga hushåll i riskzonen- lärdomar för framtiden” [Short-sighted
households in the risk zone – lessons for the future], October 2011 for more
information.
3 The variable mortgage rate is actually an interest rate that is fixed for 3 months.
As this is a very short fixed-rate period, such loans are considered to be
variable-rate loans. In this report, loans in Germany and Denmark with a period
of less than one year are considered to be variable, with all others considered to
be fixed.
4 Riksbank monetary policy report, February 2012.
BKN’s Market Report February 2012
have a loan with a variable interest rate5. The proportion
of Danish mortgages with a variable interest rate has more
than doubled over the last eight years6 as many people
abandoned the traditional system of mortgages fixed for
30 years. 30 years is a very long time, but the system does
allow loans to be repaid early without having to pay
interest differential compensation (see section on interest
differential compensation). In Germany, 26 per cent of
loans are fixed with a period of longer than ten years, with
12-year and 15-year fixes available, for example. However,
as in Sweden, German lenders also require interest
differential compensation in the event of early repayment.
After ten years, however, German mortgage holders can
repay their loans early without any interest differential
compensation.
Figure 3. Mortgages and per cent of loans
with flexible interest rate
70
fixed interest rates7. Those with variable interest
rates mainly default on payments following interest rate
increases, which give them an interest rate shock, which in
turn leads to cash flow problems. This observation may be
of interest to Sweden, as the mortgage loan stock is
increasing and the proportion of loans with variable
interest rates is high compared with Germany and
Denmark.
Why do mortgage borrowers in Sweden prefer
variable interest rates?
One reason why many people choose a variable interest
rate in Sweden is because the banks have offered
borrowers variable interest rates with a considerably
lower average interest rate than a fixed-rate loan. Without
going into the details of monetary policy, it may be
observed that there has been a downward trend in base
rates in Sweden, Germany and Denmark since the
beginning of the 1980s.
60
Figure 4. Policy rates
9
8
7
In this figure flexible mortgages are defined as mortgages with a fixed
interest rate over a period shorter than one year (even in Sweden).
Cambell and Cocco (2011) studied variable-rate and
fixed-rate loans in the USA for the period from 1970 to
2005. They found that it was far more common for households with variable interest rates to have difficulty meeting interest payments on their mortgages than those with
3
2
1
0
Denmark
Sweden
Germany
UK
2012
Source: Deutsche Bundesbank, Statistics Denmark, Macrobond,
Statistics Sweden.
4
2010
Swedish mortgages (left axis)
Denmark
Sweden
Germany
5
2008
0
6
2006
dec-11
dec-10
dec-09
dec-08
dec-07
dec-06
dec-05
dec-04
dec-03
0
10
per cent
20
500
2004
1 000
30
10
2002
40
1998
1 500
per cent
BnSEK
50
1996
2 000
2000
2 500
5
USA
Source: Macrobond
5 According to data from the Deutsche Bundesbank in December 2011, which
excludes sole traders with mortgages. Sole traders represent around 20 per cent of
households with mortgages in Germany.
During this period, borrowers with variable interest rates
have been able to take advantage of cuts in interest rates
as mortgage rates have fallen in line with the repo rate. In
countries where fixed interest rates and long fixed-rate
periods are the norm, borrowers have not been able to
benefit from the “low interest rate climate” to the same
extent as in Sweden, for example. A person who bought a
house in Germany in January 2003 and fixed the interest
rate for ten years, when the average mortgage rate was 5.4
per cent, would not be able to benefit from the interest
6 For more information on the mortgage markets in Germany, the Netherlands,
the United Kingdom and Denmark, see BKN’s report, Bolånemarknader för väl
fungerande bostadsmarknader en internationell jämförelse [Mortgage markets for
well-functioning housing markets – an international comparison], 2011.
7 J.Y. Cambell and Cocco, J.F. (2011), “A Model of Mortgage Default”, NBER
Working Paper, No. 17516.
BKN’s Market Report February 2012
Figure 5. Mortgage rates in Sweden
Figure 6. Flexible real mortgage rates
6
5
4
3
2
Denmark
Sweden
jan-12
jan-11
jan-10
jan-09
jan-08
jan-07
jan-06
jan-05
0
jan-04
1
Germany
Source: Eurostat and Marcobond
The interest rate for variable-rate loans has on average
been highest in Germany and lowest in Sweden. Shortterm variable-rate loans are classed as bridging loans in
Germany and are only used for very short-term financing
and it is widely known that these are not the most
advantageous type of mortgage loan.
10
9
8
7
6
5
Figure 7. 5-year real mortgage rates
4
3
7
2
6
1
8 Unfortunately, no data is available from 1997 for mortgage rates in Denmark
and Germany, so the series only goes as far back as 2003.
Denmark
Sweden
jan-12
jan-11
jan-10
-1
jan-09
0
jan-08
The figure 5 shows that the variable interest rate has on
average been lower than the two fixed interest rates. The
figures below show the interest rates on loans with similar
fixed-rate periods8 in the different countries. In order to
enable a comparison to be made of the interest rates in
countries with slightly different inflationary trends, we
have used real interest rates in the interest rate
1
jan-07
Figures 5-8 illustrate mortgage rates on new loans.
2
jan-06
Source: Macrobond
3
jan-05
10-year
per cent
jan-12
jan-10
jan-08
jan-06
5-year
4
jan-03
3-month
jan-04
jan-00
jan-02
5
jan-98
0
jan-04
per cent
comparisons and in the arithmetic example below. These
real interest rates are calculated as the nominal interest
rates less actual inflation.
jan-03
rate cuts unless he/she was willing to pay interest
differential compensation to the bank or building society.
Danish borrowers, on the other hand, would have been
able to repay their fixed-rate loan using a new variablerate loan without paying interest differential
compensation, as permitted by the Danish mortgage
system. Figure 3 shows that this is exactly what Danish
borrowers chose to do in 2003-2006 and 2009. Nonamortising loans were introduced in 2003, which led to a
further desire to repay traditional loans and move to nonamortising loans with a lower variable interest rate. As
long as house prices increased, the equity in the house also
increased and there was little or no incentive for households to amortise. This pattern of behaviour was also
observed in Sweden, where 30-year loans with fixed
interest rates do not exist. The longest term for Swedish
mortgages is ten years and interest rates on fixed-rate
loans has been considerably higher than on variable-rate
loans for a relatively long time. The difference between a
fixed-rate loan with a term of five years and one with a
term of ten years is therefore not as great.
per cent
6
Germany
Source: Eurostat and Macrobond
Interest rates that are fixed for five years, on the other
hand, are lowest in Denmark and highest in Sweden.
We can also see that inflation is higher than the nominal
interest rate on five-year mortgages in Denmark (the real
BKN’s Market Report February 2012
about the mortgage markets in these countries.
interest rate is negative).
An arithmetic example
Figure 8. 10-year real mortgage rates
If a Swedish borrower decided to buy a house with a
mortgage fixed for ten years in January 2003, he or she
would have had to pay a real annual mortgage interest
rate of 4.8 per cent, while someone who chose a variable
interest rate at the same time would have paid a real
annual mortgage interest rate of 2.1 per cent on average
up to the present day. We will continue to use real prices
and interest rates in order to enable an accurate
comparison of the costs in the different countries.
7
6
per cent
5
4
3
2
Denmark
Sweden
jan-12
jan-11
jan-10
jan-09
jan-08
jan-07
jan-06
jan-05
jan-03
0
jan-04
1
Germany
Source: Eurostat and Macrobond
The real mortgage interest rate for ten-year mortgages is
again highest in Sweden. The interest rates in Denmark
and Germany are very similar to one another. In other
words, it is much more expensive to fix interest rates in
the long term in Sweden than it is in Denmark and
Germany.
Figure 9. 10-year mortgage rate minus <1-year rate
4
per cent
3
2
1
0
Denmark
Sweden
jan-12
jan-11
jan-10
jan-09
jan-08
jan-07
jan-06
jan-05
jan-03
jan-04
-1
-2
7
Germany
Source: Eurostat and Macrobond
The ten-year fixed mortgage rate is significantly higher
than the three-month rate in Sweden. Only when the
financial crisis was at its worst during autumn 2008 did
the ten-year rate fall below the three-month rate. This has
been the case for long periods in Denmark and Germany,
which is an indication that something must be different
Let us assume that a household borrowed SEK 1.5 million
to buy a house in January 2003. The household had the
choice of either financing the loan with a variable interest
rate or fixing the interest rate for five or ten years. Let us
assume that the fixed-rate five-year loan rolled over to a
new five-year loan in January 2008 at the interest rate
applicable at that time. The overall real interest cost
between January 2003 and December 2011 was SEK
451,000 in real terms if the household had opted for a
variable interest rate. If the household had instead chosen
to fix the interest rate for five years, the cost would have
been SEK 685,000, while if it had chosen to fix the
interest rate for the entire period, i.e. ten years, the
household would have had to pay SEK 771,000. Of
course, the household is not aware of this when deciding
which type of loan to choose in January 2003. All the
household can consider is how high the long-term
government borrowing rate is compared with the shortterm rate, i.e. the slope of the return curve. If the curve is
steep, this indicates that the short-term interest rate is low
compared with the long-term rate and can be expected to
rise in the future. The figure below shows the annual cost
for each possible choice made by the household in January
2003. The cost of the fixed-rate loans falls as a result of
inflation reducing the size of the loan over time.
BKN’s Market Report February 2012
3
80
2,5
70
60
2
50
1,5
40
1
30
0,5
20
10
0
0
-0,5
2003
2005
<1-year
5-year
2007
2009
2011
100
3,5
90
3
80
2,5
70
60
2
50
1,5
40
1
30
0,5
20
0
10
0
2003
10-year 10Y-3M (right axis)
10år-
<1-year 5-year
If we look at Denmark now and assume that a Danish
household borrows SEK 1.5 million in January 2003 to
buy a house9 and has the same options for financing its
mortgage. The real variable interest rate was an average of
2.4 per cent between January 2003 and December 2011.
If the household had opted for a fixed interest rate for five
years, the average real interest rate would have been 2.9
per cent per annum with the ten-year fixed rate at 3.6 per
cent. In other words, the difference between the shortterm and long-term interest rates was less than in Sweden.
The Danish household would have incurred a total
interest cost of SEK 559,000 if it had opted for a variable
interest rate. If it had chosen instead to fix the interest rate
for five or ten years, the cost would have been SEK
579,000 and SEK 663,000 respectively. The difference in
interest costs between fixed and variable interest rates is
therefore less than it is in Sweden. The difference is also
not as great if we examine the annual interest rate cost
compared with Sweden. Of the eight years in the period,
the household would have benefited from having a fiveyear fixed rate for four of those years.
9 To simplify the example, we are assuming that all countries use Swedish kronor
(SEK).
2009
2011
-0,5
10-year 10Y-3M (right axis)
During the financial crisis 2008 the slope of the yield curve was negative in
Denmark which means that the short-run interest rate was higher than the
long-run. During 2011 the slope of the yield curve has been considerably
steeper in Denmark than in Germany and Sweden. The Swedish yield
curve is less steep because the interest rate on short-run government
bonds is higher in Sweden compared to the other countries. The 10-year
interest rate is almost equally high in the three countries.
The same arithmetic example for Germany gives a similar
result to that of Denmark.
Figure 12. Yearly mortgage cost on a 1.5 million SEK
mortgage - three different types of mortgages - Germany.
Cost of mortage, thousand SEK
The figure above clearly shows that over the eight years
only in 2008 would the household have wished to have
fixed-rate interest instead of variable. Overall, however,
those who fixed their interest rate for ten years in 2003
would have paid the most over the period.
2007
Source: Eurostat and Macrobond
Source: Macrobond
The average slope of the government bond yield curve (10 year – 3 months)
is marked with green crosses. When it is low (e.g. 2008) it means that
the 10-year interest rate is low compared to today’s interest rate.
2005
Slope of the yield curve
3,5
90
Figure 11. Yearly mortgage cost on a 1.5 million SEK
mortgage - three different types of mortgages - Denmark.
3,5
100
90
3
80
2,5
70
60
2
50
1,5
40
1
30
0,5
20
10
0
0
-0,5
2003
2005
<1-year
2007
2009
2011
Slope of the yield curve
100
Slope of the yield curve
Cost of mortage, thousand SEK
Figure 10. Yearly mortgage cost on a 1.5 million SEK
mortgage - three different types of mortgages - Sweden.
Cost of mortage, thousand SEK
8
5-year 10-year 10Y-3M (right axis)
Source: Eurostat and Macrobond
It would have been more expensive if the household had
fixed the mortgage for five or ten years compared with
having a variable interest rate 10, although the difference
between loans with a variable interest rate and those with
10 As previously mentioned, variable interest rates are not used to finance
ordinary mortgages, but only for short-term bridging financing. In this example,
however, we assume that this would have been possible in order to demonstrate
the differences between the different interest costs.
BKN’s Market Report February 2012
Cheap variable-rate loans in Sweden
Why has it been so much more profitable to choose a
variable interest rate instead of a fixed rate in Sweden?
Some might say that this could be because of different
levels of risk involved in mortgage financing in different
countries, requiring different levels of risk premium. If we
assume that the interbank rate provides a measure of the
banks’ counterparty risk, which may of course vary
between countries, we can eliminate this factor by
subtracting the interbank rate from the variable mortgage
rate. This gives the figure below, which shows that Sweden
has the lowest average margin on variable-rate mortgages.
The German and Danish banks extract higher margins
from customers choosing a variable interest rate, which
could explain why German borrowers in particular
choose not to finance their house purchases using
variable-rate loans.
3
2,5
2
1,5
1
Denmark
Sweden
jan-12
jan-11
jan-10
jan-09
jan-08
jan-07
jan-06
jan-05
0
jan-04
0,5
jan-03
The arithmetic example shows that the interest costs in
Denmark and Germany are very similar for variable-rate
loans and ten-year fixed-rate loans respectively. Those
who chose to fix their interest rate for ten years in January
2003 would have paid 19 per cent more by 2011 than if
they had opted for a variable interest rate. In Sweden,
those who chose to fix their interest rate for ten years
would have had to pay 71 per cent more during the same
period. It should not be forgotten, of course, that the total
interest cost for those choosing a variable-rate loan is
significantly lower in Sweden than in both Denmark and
Germany. In Sweden, the real interest cost of a variablerate loan was SEK 451,000 for the period as a whole,
whereas in Denmark it was SEK 559,000.
Figure 13. Flexible mortgage rate minus
the interbank rate
per cent
long and short fixed-rate periods was considerably less
than in Sweden. In real terms, the total interest cost
for a variable-rate loan between 2003 and 2011 was
SEK 563,000 in Germany. If the German household
had chosen to fix the interest rate for five years, the
interest cost would instead have been SEK 626,000. If
the household had fixed the loan for ten years, the total
cost would have been SEK 670,000.
9
Germany
Source: Eurostat and Macrobond
Between October 2008 and May 2009 the mortgage rates (nominal) fell
with close to 4 percentage points in Germany and Sweden (Denmark
2.6 percentage points) due to the central banks’ actions to remedy
the crisis. The flexible mortgage rate was immediately affected and fell by
3.8 percentage points in Sweden. In Germany the mortgage rate was only
lowered by 2.5 percentage points and it explains why the spread increases
drastically in the figure above.
Figure 13 shows that the interest rate on German
variable-rate mortgages is almost three percentage points
higher than the interbank rate11. This is considerably
higher than in Sweden. On average, the margins in
Sweden, Denmark and Germany are 0.81, 1.17 and 1.89
respectively. This means that the Swedish banks offer
short-term mortgage rates that are lower than those of
their colleagues in Denmark and Germany. In contrast,
mortgage rates on loans with longer fixed-rate periods are
relatively expensive in Sweden. Loans with longer fixedrate periods are largely financed through mortgage bonds
and we are therefore calculating the difference in interest
rates between mortgage bonds with a term of five years
and a five-year mortgage rate.
11 Figure 13 also shows how the margin trend fell until 2008 in all countries, but
began to rise again during 2009 – most strongly in Denmark and Germany.
10
BKN’s Market Report February 2012
year later).
Figure 14. 5-year mortgage rate
minus 5-year mortgage bond rate
Table 1. Real aggregate mortgage expenses between
2005 and 2011.
2
per centage points
1,75
1,5
1,25
1
0,75
Country
Fixed-rate period
(SEK)
<1 år
1-5 år
5-10 år
Sverige
332 575
432 313
509 419
0,5
Danmark
443 996
339 261
393 388
0,25
Tyskland
463 595
434 544
471 790
0
Sweden
Germany
jan-12
jan-11
jan-10
jan-09
jan-08
jan-07
jan-06
jan-05
jan-04
Source: Eurostat and Macrobond
jan-03
-0,25
10-year Denmark
Source: Eurostat and Macrobond
Unfortunately there are no statistics available for five-year
mortgage bonds for Denmark. Nor are there any statistics
available for Swedish ten-year mortgage bonds. We have
therefore chosen to illustrate the margin between tenyear mortgages and ten-year mortgage bonds for Denmark
instead. The margin for five-year mortgages is slightly
higher in Sweden than in Germany. Over the period, the
difference is on average 0.79 percentage points in
Germany, while in Sweden it is 0.84 percentage points.
This shows that the margins are quite similar and do not
explain why fixed-rate loans are considerably more
expensive in Sweden than in Germany. This may be
because Swedish lenders have higher financing costs. If we
consider only the five-year mortgage bond interest rate,
the Swedish rate has averaged 3.9 per cent, while the
German rate has been slightly lower (3.5 per cent). This
shows that Swedish lenders have higher financing costs
and explains why Swedish five-year mortgages cost more
than German mortgages with the same term.
Common for all three countries is the fact that the
household in the example would have achieved the best
result by having a variable interest rate. However, this
conclusion must be interpreted with care. The reason why
a variable interest rate would have been cheaper is that
policy rates continually fell during this period. Since the
beginning of the century, monetary policy has focused on
stimulating growth by cutting interest rates. If we had
performed the same arithmetic example using January
2005 as the start year, the results would have been as
shown below (i.e. just before the ECB and the Danish
Nationalbank began a series of interest rate increases; the
Swedish Riksbank started increasing rates a year and a half
The table shows that the cost difference between a
variable interest rate and fixed interest rates is again
greatest in Sweden. The interest cost of a variable-rate
loan is considerably lower in Sweden than in Denmark
and Germany. In contrast, it is significantly higher if the
household opts to fix its mortgage for ten years. In both
Germany and Denmark it would have been cheaper to fix
the loan for five years compared with having a variable
rate.
Large fluctuations in housing costs for households with variable-rate mortgages
If we go back and examine the interest costs in Sweden
between 2003 and the present day, it is clear that households with a variable interest rate have had to absorb large
fluctuations in interest. In the arithmetic example above,
the annual interest cost in 2006 was SEK 45,000. Two
years later it was SEK 74,000 (adjusted for inflation),
which is an increase of 64 per cent. If households are able
to afford this, there is of course no reason to fix the
mortgage interest rate, particularly not in Sweden, which
has a higher margin on longer fixed-rate periods. This
shows, however, that relatively small changes in interest
rates can have a major impact on the housing costs of a
household if debts are large and interest rates are
variable.
Compared with other types of housing, it should be noted
that people who live in rented accommodation are
actually protected against large rent increases. Landlords
are not permitted to compensate for any increased
interest costs by increasing rent to the same extent. This
demonstrates that there is a feeling that it is desirable and
provides security to know what housing costs will be in
the future. There is of course a certain benefit to knowing
that interest payments will remain within specific
parameters or that the interest rate level will remain
BKN’s Market Report February 2012
constant in the future. It should also be remembered that
the arithmetic example above is very short-term. Six or
eight years is a very short period compared with the
length of time that lenders calculate the mortgage will be
outstanding. This also only reflects the trend over the past
period and not what the trend is expected to be over
coming periods. According to the Swedish Financial
Supervisory
Authority
(Finansinspektionen),
the
amortisation period is 10-50 years for a top-up loan and
40-100 years for the basic loan 12 among those lenders
who actually do want borrowers to amortise their basic
loan. Information from Household finances 2009
(Statistics Sweden) shows that the average amortisation
period is 125 years for tenant-owned properties and 71
years for single-family houses.
We are able to confirm, however, that variable-rate shortterm mortgages have been cheaper than fixed-rate
mortgages, which has led most Swedish households to
choose the former. There is also another reason why a
short-term loan may be considered advantageous in that
no interest differential compensation is payable if the loan
is repaid early.
Conditions of interest differential compensation
vary between countries
In the USA, as in Denmark, it is possible to repay a
fixed-rate loan without paying interest differential
compensation, and many people did this when interest
rates fell (see Figure 3). Lea and Sanders (2011)13 are
critical of this system. They believe that it leads to
uncertainty for lenders and can intensify house price rises,
while at the same time all borrowers are forced to pay
indirectly for the ability to repay their loan early. Generally
speaking it is more expensive to finance a loan in the
longer term. A financial analysis of a bank’s cash flow
shows that when a borrower fixes the interest rate on a
loan for five years, the bank has to finance this for five
years. If the borrower decides to repay the loan early, the
bank has paid too much for its long-term financing, as it
was not as long as it should have been. This means
additional costs for the bank and so banks in Sweden,
Germany, Canada and France, for example, use interest
differential compensation to cover these costs. Banks in
the USA are not allowed to do this and can therefore
suffer large losses if customers choose to repay or
12 Finansinspektionen (2010), Den svenska bolånemarknaden och bankernas
kreditgivning [The Swedish mortgage market and banks’ lending].
13 M. Lea and Sanders, A. (2011), “Do we need the 30-year fixed-rate mortgage?”, Working Paper, No. 11-15, Mercatus Center at Georg Mason University.
11
refinance their loans at times when the short-term
interest rate is lower than the long-term rate (which is
usually the case). The banks compensate for this cost by
charging all borrowers a higher interest rate14. It has also
been observed that low interest rates can lead to increased
borrowing and rapidly rising house prices. This was in fact
the case in Denmark15 and the USA before house prices
there fell dramatically. The major problem in the USA,
now that the house price bubble has burst, is that the
government and the central bank are financing a large
proportion of the mortgages taken over by Freddie Mac
and Fannie Mae (fixed-rate loans with low interest rates).
Put simply, this means that American households were
able to increase their borrowing while house prices were
rising by refinancing their old loans and releasing equity
which is now being financed by the American taxpayer.
Interest differential compensation exists in many
countries, but is limited in some, such as France, Italy and
Spain16. In Germany it is limited to the extent that banks
are expressly forbidden from making a profit from
interest differential compensation. Banks are only allowed
to cover the additional cost they incur when a customer
repays a loan early. As previously mentioned, however,
fixed-rate loans can be repaid after ten years without
paying interest differential compensation, provided they
have a term of more than ten years. Loans from
Bausparkassen17 (building societies) can also be repaid
early without paying interest differential compensation.
This enables German house-buyers to choose a fixed-rate
loan and so insure themselves against interest rate risk
without having to pay interest differential compensation
if they wish to repay the loan early. This is not possible in
Sweden, since all fixed-rate loans are associated with
interest differential compensation.
When a person sells a house, the fixed-rate loan can
be “repaid” without paying interest differential
compensation if the new owner agrees to take over the
14 A report written by an expert group for the European Commission found
that this is precisely the case in the USA, i.e. that US mortgage rates are higher
because the banks compensate for the cost of early repayment by applying a
higher interest rate to mortgage lending (Report of the Mortgage Funding Expert
Group, European Commission, December 2006, Brussels).
15 Danske Research (2010) found that many borrowers chose to refinance their
mortgages when the long-term interest rate fell in Denmark (Danish Covered
Bond Handbook, 2010, Danske Bank).
16 For more information, see Table 3, p. 21 in Lea, M. (2010), International
Comparison of Mortgage Product Offerings, Research Institute for Housing
America.
17 There is no equivalent to “Bausparkassen” in Sweden. This is a closed and
self-supported system where a number of people save in order to be able to buy a
house in the future. These savings finance the loans to house-buyers. A deposit of
at least 20 per cent is required in order to obtain a loan from the Bausparkassen.
BKN’s Market Report February 2012
loan18. It is also possible to take your mortgage with you if
you are buying a new house. This must be a house or a
tenant-owned property. If you are buying a holiday home
or a farm property, you cannot take your mortgage with
you, as loans on such properties are not classed as
mortgages.
differential
compensation
2,5
Figure 15. Mortgage bond and mortgage rate
minus government bond rate
4
3,5
3
per cent
2,5
2
1,5
1
0,5
2 year
5 year
jan-12
jan-10
jan-08
jan-06
jan-04
jan-02
jan-00
jan-98
jan-96
0
Mortgage minus government rate 5 year
Source: Macrobond
The government borrowing rate has recently fallen and
the difference between this rate and the mortgage rate
and the mortgage bond rate has increased considerably,
18 This can mean, however, that the sale price of the house is correspondingly
lower.
1,5
1
0,5
0
Sweden 5Y
Germany 5Y
feb-12
feb-10
feb-08
-1
feb-06
-0,5
feb-04
If the interest rate for fixed-rate mortgages were lower
than the ask rate for government bonds (plus one
percentage point), thus giving negative interest
compensation, the borrower would not receive any
money from the bank. In other words, interest
compensation is not symmetrically distributed between
the lender and the borrower. The system therefore favours
the banks over households. Mortgage holders repaying
their loans early have recently been further disadvantaged
by the fact that the government borrowing rate has
fallen.
2
feb-02
Interest differential compensation=(mortgage interest
rate-(ask rate for a government bond with the same fixed
period+1 percentage point) )*size of outstanding
debt*remaining period.
- 0,5
Figure 16. Credit risk: mortgage bond
minus government bond rate
is
feb-00
In Sweden, interest
calculated as follows:
particularly with a five-year term. We can also compare
the interest rate on mortgage bonds with the government
borrowing rate in Denmark and Germany. The difference
between the mortgage bond rate and the government
borrowing rate is measured as the housing credit risk.
per cent
12
Denmark 10Y
Source: Macrobond
We can clearly see here that the credit risk for mortgage
bonds has been highest in Sweden since 2007. This is
mainly because the government borrowing rate has fallen
rather than the mortgage bond rate has increased. Between
2002 and 2009, the government borrowing rate averaged
3.8 per cent, while between 2009 and 2011 it was
2.4 per cent. This compares with an average interest
rate on mortgage bonds of 4.3 per cent and 3.5
respectively. In other words, the government borrowing
rate has fallen by more than the interest rate for mortgage
bonds. There could well be a case therefore for
considering whether interest differential compensation
should be calculated using the government borrowing
rate. And also whether the interest rate on government
bonds is the best way of measuring the banks’ ability
to reinvest the money from repaid mortgages.
Is this the end of cheap variable-rate mortgages?
This is a highly relevant question when considering
whether to fix a mortgage rate or allow it to be variable.
During the autumn and winter, the Swedish media
reported that banks’ mortgage customers will have to pay
higher costs as a result of increased capital requirements.
The margin between the average mortgage rate and the
3-month STIBOR has increased considerably over the
BKN’s Market Report February 2012
past year and is now reaching levels last seen in 1996. It is
worth noting, however, that the margin is still lower than
in Germany and Denmark (see Figure 13).
per cent
2
1,8
1,6
1,4
8
6
4
Flexible mortgage rate
0,4
0,2
Policy rate
jan-12
jan-10
jan-08
jan-06
jan-04
0,6
jan-02
0
jan-00
1
0,8
jan-98
2
1,2
jan-96
per centage points
Figure 18. Interest rates in Sweden
12
10
Figure 17. Margin 3-month mortgage rate
minus interbank rate, Sweden
STIBOR 3-month
jan-12
jan-10
jan-08
jan-06
jan-04
jan-02
jan-00
jan-98
Soucre: Macrobond
jan-96
0
13
Source: Macrobond
The question, however, is whether the low margins of
recent years can be considered sustainable in the long
term or exceptional and a thing of the past? In December,
some bank chiefs suggested that the repo rate and the variable mortgage rate are not connected. The figure below
shows the relationship between the interest rate on variable-rate mortgages, the 3-month STIBOR and the base
rate. As above, we can see that the margin between the
mortgage rate and the STIBOR is currently somewhat
higher than the average since 1989 (average: 1.35, Jan
2012: 1.83). In contrast, the difference between the
mortgage rate and the repo rate remains lower than the
average (average: 2.76, Jan 2012: 2.6). The close
correlation between the base rate and the mortgage rate
between 2002 and 2009 appears to represent a unique
situation rather than a normal state of affairs.
We are therefore able to observe that the mortgage rate
mostly follows the base rate, but that this is not
necessarily always the case and the margin between them
has been unusually small over the last ten years. We are
now seeing a structural shift where the variable mortgage
rate is no longer as closely linked to the base rate as it was
before.
We can also compare the relationship between the
different interest rates with those in Germany and
Denmark. Here again we are comparing data between
2003 and the present day.
14
BKN’s Market Report February 2012
Figure 21. Interest rates in Denmark 2003-2011
Figure 19. Interest rates in Sweden 2003-2011
8
8
7
7
6
per cent
5
4
3
5
4
3
2
2
<1-year mortgage rate
Flexible mortgage rate
Policy rate
jan-12
jan-11
jan-10
jan-09
Policy rate
CIBOR
STIBOR
Source: Eurostat and Macrobond
Source: Macrobond
Again, we see data describing the mortgage rates on new loans.
Observe that, the scale on the y-axis in figures 19-21 are the same. In
Sweden the flexible mortgage interest rate represents the 3-month rate
while in Germany and Denmark it represents the mortgage rate on
mortgages fixed over a period less than one year.
We can see above the close relationship between 2003
and 2009. The situation in Germany is a little different.
Figure 20. Interest rates in Germany 2003-2011
8
7
6
per cent
jan-08
jan-07
jan-06
jan-05
jan-12
jan-11
jan-10
jan-09
jan-08
jan-07
jan-06
jan-05
jan-03
jan-04
0
0
jan-04
1
1
jan-03
per cent
6
5
In both Denmark and Germany, the margin between the
variable mortgage rate and the base rate is greater
than it is in Sweden. This indicates that Swedish banks
have begun to adapt margins to a level more closely
approximating that in other countries rather than increase
them to unreasonable levels. In order to understand the
difference and movement between the base rate and the
mortgage rate, we need to examine how the banks finance
mortgage lending. Until now, Swedish banks have been
able to offer mortgage borrowers very attractive interest
rates. New rules are forcing banks to finance their lending
on a more long-term basis, which means that the banks
will no longer be able to offer borrowers such cheap shortterm loans.
4
3
How are Swedish mortgages financed?
2
The banks finance their operations through equity (such
as shares) and borrowing (loans, sale of mortgage bonds
and bank bonds). It is cheaper for banks to finance their
operations through borrowing rather than equity, since
creditors take precedence over shareholders in the event
of bankruptcy. Shareholders therefore demand a higher
risk premium than lenders. Loans to banks are also
considered to be guaranteed by the government. One
example of a government guarantee is the deposit
guarantee and the fact that the government can be
compelled to act as guarantor for the banks because they
are vital to the system and are needed in order to maintain
the financial system in pressurised situations. These
government guarantees mean that lenders require a lower
risk premium when lending to banks. This will change
somewhat in the future, however, as ratings agencies (S&P,
<1-year mortgage rate
Policy rate
jan-12
jan-11
jan-10
jan-09
jan-08
jan-07
jan-06
jan-05
jan-03
0
jan-04
1
EURIBOR
Source: Eurostat and Macrobond
It is clear here that the base rate is considerably lower
than the variable mortgage rate, although there is a strong
correlation. The relationship in Denmark is more like the
one in Germany.
BKN’s Market Report February 2012
The Swedish Act on Issuance of Covered Bonds [Lagen
om utgivning av säkerställda obligationer (2003:1223)]
describes how this may be done and what rules
apply. The Swedish Financial Supervisory Authority
(Finansinspektionen) is the authority responsible for
ensuring compliance with this law. Covered bonds, as the
name suggests, are covered by a cover pool of assets. This
means that if the bank or building society were to enter
into bankruptcy, the cover pool would still remain. Those
who have invested in the covered bonds would then claim
against the cover pool rather than the bank or building
society. This makes covered bonds safer than uncovered
bank bonds where investors risk losing part of their
investment if the issuer (the bank or building society)
enters into bankruptcy. The cover pool consists of various
types of loan and can contain up to:
1. 75 per cent of the market value of real estate, site
leasehold rights and tenant-owned property that is
intended for residential use,
2. 70 per cent of the market value of real estate that is
intended for agricultural use, and
3. 60 per cent of the market value of real estate, site
leasehold rights and tenant-owned property that is
intended for commercial or office use.
The market value of property used as security for
19 BKN (2009) covered this in “Varifrån kommer pengarna?” [Where does the
money come from?], Marknadsrapport [Market report], May 2009. Here we also
indicated that short-term interest rates will rise and that “The cautious are
planning for higher mortgage rates” (p. 7).
As previously mentioned, the majority of mortgages in
Sweden are financed through covered bonds. The
situation is similar in Denmark, but different in Germany.
Germany’s mortgage market is more diversified than the
Swedish and Danish markets. Bausparkassen, for example,
occupy an important position and they finance solely
through loans and not through covered bonds23. The
figures below illustrate the relationship between the size
of outstanding mortgages and covered mortgage bonds
(CB) in nominal domestic currency, as well as covered
bonds as a proportion of GDP.
Figure 22. Mortgages and covered bonds,
Sweden
150
2 500
125
2 000
100
1 500
75
1 000
50
500
0
per cent
Swedish mortgages are primarily financed through
mortgage bonds20. Since 2008, all Swedish mortgage
bonds are in principle classified as covered bonds. Figure
16 illustrates how the spreads on these have widened
compared with the government borrowing rate and shows
that the credit risk for mortgages has increased. Covered
bonds are issued (sold) by building societies and banks21.
mortgage lending in the cover pool is reviewed on a
regular basis. The portion of mortgages that cannot be
covered by the cover pool is financed through bank loans
and the issuing of bank bonds. As the cover pool is linked
to the market value, it may reduce in size if house prices
fall. According to Janzén, Jönsson and Nordberg (2011),22
the Swedish banks have diversified their cover pool and
no mortgages reach the maximum limit of 75 per cent,
meaning that price falls do not have an immediate impact
on the cover pool. However, large house price falls may
affect the willingness of foreign investors in particular to
buy covered bonds in Sweden, since very large price falls
reduce confidence.
Bn SEK
Moody’s and Fitch) have begun to exclude the indirect
government guarantee when calculating a bank’s credit
rating. This has resulted in the entire banking sector being
downgraded in principle, which means more expensive
borrowing for banks. The support loans from the Riksbank
and the Riksgälden (Swedish National Debt Office),
which offered the banks very favourable low-cost loans,
have also in principle expired19.
15
25
2008
2009
2010
2011*
0
Covered bonds (CB)
Mortgages
CB as share of GDP (right axis)
*) Forecast
Source: Swedish Bankers´Association, Macrobond and Statistics Sweden.
20 See Riksbanken (2011), Den svenska finansmarknaden 2011 [The Swedish
financial market 2011].
22 Janzén, H. Jönsson, K. and Nordberg, A. (2011), “Husprisfall- konsekvenser
för finansiell stabilitet” [House price falls – Consequences for financial stability]
in Riksbankens utredning om risker på den svenska bostadsmarknaden [Riskbank
examination of risks on the Swedish housing market], Sweden’s Riksbank,
Stockholm.
21 There are various kinds of covered bonds. In other countries, for example,
there are covered bonds for ships and the public sector. So far in Sweden, only
covered mortgage bonds have been issued.
23 For more information, see: BKN (2011), Bolånemarknader för väl fungerande
bostadsmarknader, En internationell jämförelse [Mortgage markets for wellfunctioning housing markets – an international comparison].
BKN’s Market Report February 2012
proportion of their risk-weighted assets25 from 2013 and
12 per cent from 201526. This means that the banks must
hold greater security for each krona lent, which will
probably see them exercise greater restraint in their
lending.
Figure 23. Mortgages and covered bonds,
Denmark
150
2 500
Bn DKK
100
1 500
75
1 000
50
500
0
per cent
125
2 000
25
2008
2009
2010
2011*
The banks’ earnings from loans to house-buyers were
debated in the media in autumn 2011. Using data from
Statistics Sweden, we have estimated that Swedish
lenders earned a total of around SEK 72 billion after tax
between 2001 and 2010 on the margin between interest
income and interest cost for mortgages27.
0
Figure 25. Estimated profit on mortgages
Covered bonds (CB)
Mortgages
CB as share of GDP (right axis)
10
8
Source: Denmarks Nationalbank, Statistics Denmark and Macrobond.
7
Bn SEK
*) Forecast
Figure 24. Mortgages and covered bonds,
Germany
1 000
75
400
50
200
0
2009
2010
2011*
4
0
25
2008
0,3
5
0,2
0,1
1
per cent
Bn EUR
100
6
2
125
600
0,4
3
150
800
0,5
9
per cent
16
0
Covered bonds (CB)
Mortgages
CB as share of GDP (right axis)
*) Forecast
Source: Association of German Pfandbrief Banks,
Deutsche Bundesbank, ECBC and Macrobond.
Under Basel III, covered bonds and government bonds
will become more desirable for the banks24. The issuance
of covered bonds is also growing very strongly in Sweden.
Basel III requires banks to hold more equity and have
greater liquidity from June 2012. The Riksbank and the
Swedish Financial Supervisory Authority are going even
further, however, and want to see even stricter
requirements for Sweden’s four major banks. They believe
that the banks should have 10 per cent core capital as a
24 Deutsche Bank Research (2011), Solvency II and Basel III, Reciprocal effects
should not be ignored, Frankfurt am Main.
2002
2004
Profit after tax on mortgages
2006
2008
2010
0,0
as share of GDP (right axis)
Source: BKN’s own calculations and Statistics Sweden
BKN has calculated the profit at building societies using
the net interest income and the size of outstanding
mortgages. Profits fell between 2006 and 2008 when the
margin between the mortgage rate and the interbank rate
was at its lowest (see Figure 17). The emergency measures
of the Riksbank and the Riksgälden in 2009 reduced the
financing costs of mortgages, resulting in record profits for
building societies and banks, which at the same time
increased lending by almost 10 per cent.
Who is sitting on the interest rate risk?
In Sweden, households only bear interest rate risk if
they have a variable-rate mortgage. Mortgages are also
personal, which means that as a mortgage holder, you
25 Risk-weighted assets means that the risk to the assets is assessed on the basis
of applicable capital adequacy requirements.
26 Finansinspektionen (2011), FI vill se högre kapitalkrav för svenska banker [FI
wants to see stricter capital requirements for Swedish banks], statement
2011-11-25, www.fi.se.
27 We have assumed that all lenders have had the same margin on their
mortgages as building societies have had.
BKN’s Market Report February 2012
cannot simply give the house back to the bank and be
done with the loan and the high interest payments. In the
example above, we saw that relatively small interest rate
increases can result in large increases in interest costs for a
mortgage of SEK 1.5 million. There is a major interest rate
risk here. Suppose interest rates were to increase. This
results in higher interest payments for households with
variable-rate mortgages. House prices, which are sensitive
to interest rate movements, will fall28. After a while, the
household has difficulty paying the high level of interest
and decides to sell the house. The price of the house has
fallen, however, and the household has to sell at a loss. The
loss is unfortunately so large that the purchase price is not
enough to repay the mortgage in full. Since a mortgage is
personal, the household is liable to repay the remaining
portion of the debt, including interest. This happened to
some households during the financial crisis of 1992. In
other words, it is households that are sitting on the risk in
Sweden. Fixed-rate periods are mostly ten years,
compared with the traditional Danish system which has
fixed-rate periods of 30 years. Under the traditional
Danish system, mortgages are financed directly on the
credit market through mortgage bonds. If a household is
forced to sell its house, the mortgage bond is bought back
at the prevailing market price. As a result, bond prices
follow house prices more closely. If interest rates go up,
the house price falls, as does the bond price. In other
words, the capital market bears the interest rate risk.
Table 2. Matrix of interest rate risk
Actor
Flexible rate
Households
SE, DK (new)
Fixed rate
Credit market
DK (trad.)
Bank/building society
DE, SE
Under the new mortgage system in Denmark, households
bear the risk of the interest rate increasing sharply.
Germany, like Denmark, has a long tradition of mortgages
being financed through mortgage bonds – called
“Pfandbriefe”. Here, however, the bond is not as closely
linked to the mortgage as it is in Denmark and it is the
bank that bears any losses in this system.
Broaden the range of mortgages
Mortgage customers have different needs and different
abilities to cope with interest rate increases, house price
28 Leonhard, A. (2011), Inflation targeting and monetary policy, an econometric
analysis of 7 OECD countries and the Eurozone, Universität Duisburg-Essen,
forthcoming.
17
falls and deposit requirements, for example. Before the
Swedish Financial Supervisory Authority’s requirement
for 15 per cent deposits was introduced in Sweden,
several other options were discussed for putting a brake
on the increase in lending. This discussion is now underway in the United Kingdom, where there is opposition to
a mortgage ceiling. The reason for this is that there are
many young people who have not yet been able to save up
a large deposit but who have a good job and salary and are
therefore able to afford relatively high housing costs
(interest and amortisation) but are unable to pay a high
deposit. In this way, the mortgage ceiling may prevent
young people with a good income from buying their own
house. Lea and Sanders (2011) advocate a wide range of
options on the mortgage market to take into account the
fact that households have very different needs and
abilities.
BKN’s latest market report (Oct 2011) shows that
households act with a short-term focus. SBAB Bank found
that between 2000 and 2011, variable-rate loans
represented on average 67 per cent of SBAB’s new
lending, fixed-rate loans with terms of 1-4 years were
25 per cent and fixed-rate loans with a term of ten years
were 8 per cent29. This indicates that borrowers very
rarely look more than four years ahead and that they base
their decision solely on the difference between the fixed
and variable interest rates at the time the loan is taken
out. A UK study has also shown that the majority of UK
borrowers focus only on the direct, short-term costs of a
loan and not on the long-term costs30. As a result, they do
not perform a long-term calculation that compares
different mortgage products and options when taking out
a mortgage. It should also be added that when a household has a mortgage approved, it is the bank that decides
whether or not the customer is given the loan. This means
that the customer may feel in a weak position and may
accept the bank representative’s suggestion of how the
mortgage should be financed so as not to jeopardise the
approval of the loan. There also appears to be short-term
behaviour in Sweden, which has led to a high level of debt
while interest rates have been low. This high level of debt
makes Swedish households and banks vulnerable. To
reduce this vulnerability, it is desirable for households to
have more options to choose from. Households with large
debts quickly feel the effects of seemingly small interest
29 SBAB Bank (2012), “Val av bindningstid 2011” [Choice of fixed-rate period
2011], SBAB Bank Specialstudie [SBAB Bank Special Study].
30 Financial Services Authority (2001), “Choosing a mortgage, Report of a
research review and qualitative research on the mortgage buying process”,
Consumer Research 8, United Kingdom.
rate increases. If interest and amortisation payments also
represent a relatively large proportion of income, the
household is very sensitive to interest rate increases. In
this case it may be safer for the household to fix the
interest rate on its loans and so insure against interest rate
increases. As previously mentioned, variable-rate loans
with an interest rate cap are available in Denmark. These
would certainly also be of interest to Swedish households
with large debts. A number of Swedish banks offer
mortgages with an interest rate cap, although the
maximum period for these caps is five years. The
premium for this is relatively high, however, and the level
of the interest rate cap varies greatly between banks.
There is also a suggestion that the EU should have a crossborder mortgage market31. However, it will take
several years before this can become a reality.
Conclusions
Being heavily in debt is risky. The “ever-increasing” house
prices and low variable interest rates have given many
people a sense of security. As interest rates start to rise,
as a result of factors on the credit market that cannot
be fully controlled by the Riksbank, it may be time to
question the mortgage market and to broaden the range of
loan products, which may reduce the interest rate risk of
households at a reasonable cost. The Danish and German
mortgage markets offer loans with long fixed-rate periods,
which have lower interest costs than the Swedish loans. In
Sweden there are no loans with a fixed-rate period longer
than ten years and it is also expensive to repay a fixed-rate
loan early. Interest differential compensation depends on
the difference between the mortgage rate and the
government borrowing rate. As the government
borrowing rate has fallen relative to the mortgage rate in
recent times, those who wish to repay their loans early
will have to pay a higher level of interest differential
compensation than before. If the interest rate on a fixedrate loan to be repaid early is lower than the government
borrowing rate, the borrower does not receive any money
back from the bank. In other words, the system is
asymmetric and favours the bank.
In Sweden, a system similar to the Danish system would
protect households against interest rate increases. The
ingenious thing about this system is that it also protects
households against falling prices. The German system,
with its long terms, also reduces the interest rate risk for
indebted households.
The era of cheap variable-rate mortgages is at an end, as
the banks’ financing costs are increasing as a result of rules
and requirements for longer-term financing and greater
equity. The credit risk within the banking system and for
mortgage bonds has increased, which also means more
expensive mortgages. The short-term cheap mortgages
that were closely linked to the base rate between 2002
and 2009 were the exception rather than the rule. Neither
Danish nor German banks and building societies have managed to offer their customers margins on variable interest
rates as low those Sweden has offered.
31 See Appendix I, “En Europeisk bolånemarknad” [A European mortgage
market], in BKN’s report, Bolånemarknader för väl fungerande bostadsmarknader
En internationell jämförelse [Mortgage markets for well-functioning housing
markets – an international comparison], (2011).
BKN’s Market Report February 2012
About BKN
The Swedish National Housing Credit Guarantee Board,
BKN, is a government agency under the Ministry of
Health and Social Affairs. BKN plays two roles – a role
as the government’s expert agency and a role as a market
participant.
As an expert agency BKN monitors and analyses issues
relating to housing finance, housing- and housing construction markets.
As a market participant BKN administers government
credit guarantee programmes for housing development.
BKN also gives support to reconstruction of housing
companies that are owned by the municipality in weak
housing markets, administers government support to
municipalities who supply rent guarantees, and provide
first-time-home-buyers
with
home
purchase
guarantees.
19
Box 531, S-371 23 Karlskrona, Sweden, Telephone +46 - (0)455-33 49 40, E-mail [email protected] www.bkn.se