Last summer, an amortization requirement was introduced for mortgages as a way to curb Swedes’ indebtedness. It seems to have had some impact, but maybe not as much as one would have liked. Now comes additional rules that mean more amortization for some.
All new mortgages must be repaid
The repayment requirement introduced in the summer of 2016 meant that all new mortgages must be repaid by at least 2% per annum until the loan-to-value ratio is below 70% and then at least 1% must be repaid until a 50% loan-to-value ratio has been reached. After that, there is no requirement that you pay off at all.
In practice, this meant that people would be forced to buy slightly cheaper housing than before because what counts in the first place when deciding how expensive to buy is the monthly cost. Even though the amortization is not a cost but actually a form of investment (since each installment lowers the interest rate slightly), it is still money that has to be paid out every month.
The repayment must therefore also be included in the monthly budget and the more you have to repay, the less money you have to transfer to another. Before the repayment requirement came, it was common for people not to repay / pay off their mortgages at all. They either thought it was too expensive or that money could be spent on better things. With the amortization requirement, you have no choice and have to adapt.
The new amortization requirement is based on the old one
Most people may have a pretty good look at the old repayment requirement, but I still wanted to go through what it means, because the new rules are based on the existing ones. The new amortization requirement will come into force as early as March 2018.
With the new rules, a debt ceiling is introduced which affects the level of repayment. If your loan amounts to more than 4.5 times your gross salary (pre-tax salary), you must repay an additional 1 percent more than the old levels. This means that you who have a loan-to-value ratio of 70% or more must repay 2 + 1% per annum, a loan-to-value ratio of 50 – 70% must repay 1 + 1% and everyone who has a 50% loan-to-value ratio must repay 1%.
This means that both you who have a higher loan-to-value ratio (which most people who take a mortgage have) must repay the full 3% annually, and this also means that even if you would have come down to a low loan-to-value ratio below 50%, you will You are still not completely off to pay off your mortgage. However, it is unlikely that those who have such a low loan-to-value ratio will have such a big problem with amortizing any percentage.
Of course, those who will be most affected are those who have to repay 3%, which is probably the vast majority. It is most common to have an 80-85% loan-to-value ratio on a new mortgage if you have not managed to save a lot of money to invest in the cash deposit or buy a really cheap home.
What if you count on it?
The first thing that is interesting is probably where the limit goes to even take on the tougher amortization requirements. What you need to spend on an additional percentage is that you have a loan that exceeds 4.5 times the gross salary per year.
If we say that you two are borrowing together and both have USD 30,000 in pre-tax salary, then together you earn USD 720,000 in one year. You can then borrow up to USD 3,240,000 before being forced to further repay. If we expect you to borrow at 85% of the value of the home, you can then buy a home for about USD 3,800,000 at most.
If you earn less together or if you are lonely and want to borrow, then you must of course recalculate it on the salary that is available. If you both have USD 20,000 in salary, that would mean that you can borrow up to USD 2,160,000 before the tougher amortization rules start to apply, which means that you can buy housing for just under USD 2,550,000 with an 85% loan-to-value ratio.
If we instead look at an example for the one who is forced to the tougher percentages, it looks as follows. If you take out a loan of USD 2,500,000 with a loan-to-value ratio exceeding 70%, the old repayment requirement would mean that you have to repay approximately USD 4,160 every month. If you then have to repay one percent extra, it would be USD 6,250.
There is thus a third more to amortize and about USD 2,000 more per month to be paid out in this particular example. Of course, the bigger the loan, the more it will be in kronor. For some it may be quiet and there is money to take away in the monthly budget, but for many it can probably affect a lot.
How does the new amortization requirement strike?
Unfortunately, it feels like this requirement, just as it did before, mainly strikes against certain groups. Of course, there is a good idea behind – preventing people from borrowing more than they should – and it also works perfectly well on that point. Furthermore, it is never wrong to repay since the mortgage loan is not a bad thing, but a good thing that slowly but surely improves your finances.
BUT at the same time, it gets a little skewed in such a way that some become more vulnerable than others. These are the people who are trying / want to enter the housing market and are going to buy their first home, the younger ones who want jobs in slightly larger cities and need to buy a home and those who may not yet have built up their salary too much who get stuck in The net.
All those who already have a home and a mortgage can be calm as long as they do not intend to move, as the repayment requirement only applies to new loans and everyone who has managed to save more money or made housing deals sooner and got more capital together is doing pretty well too .
Sure, you can’t get mad at those who have a better economy or a better starting point, but at the same time, all the young and new in the housing market still have to compete with these people for the same housing. Thus, it is not immediately easier for those who from the beginning have difficulty when they are also pressed with additional requirements.
There is no doubt that it is good to amortize. It is an investment that leads to lower costs in the future and it creates greater security in the economy. However, the question is whether additional amortization is really needed for those who already have to repay 2% annually. Of course, you do not want to buy such an expensive home that the margins in the monthly budget will be too small, but the question is whether the margins would have been perfectly ok as long as you did not have to put those extra thousand notes that the new amortization rules require.
It can be difficult to know what the optimal solution really is. Many of those who are against the new tougher rules for the amortization requirement also say that it is the wrong situation in general to make it harder for people to borrow. It can have a negative impact on the housing market, that people will be locked into their current housing even though they need to move and that young people, as I said, will clearly find it harder to buy a home. Maybe there are other ways to keep debt in check.