Households with high loan-to-income ratios, i.e. large loans in relation to income, are vulnerable. They are sensitive to rising interest rates since their monthly expenses are affected more than households with lower loan-to-income ratios. They are also somewhat more sensitive to a loss of income, for example if they become unemployed.
Households with a high level of debt can also be affected by a fall in asset prices, such as house or share prices, since they are more exposed to such a development. As a result, they may need to reduce their consumption if the economy were to dip, which would amplify an economic downturn.
The percentage of vulnerable households – those with high loan-to-income ratios – has increased in the past five years. The amortisation requirement appears to have broken this trend, but there are still a large number of households taking on loans that result in a high loan-to-income ratio. This development is largely due to the fact that house prices have risen much faster than household income for a long period of time.
The mortgage cap and the current amortisation requirement only have a limited effect on households with high loan-to-income ratios since these regulations primarily target households with high loan-to-value ratios, i.e. a high level of debt in relation to the value of the home. One way to reduce the number of vulnerable households is to tighten the amortisation requirement so the loan-to-income ratio affects the size of the amortisation payments. This FI Analysis studies the consequences of a stricter amortisation requirement, under which new mortgage holders with a loan-to-income of more than 450 per cent (based on gross income) must amortise 1 percentage point more every year than under the current requirement.
This stricter amortisation requirement will primarily affect new mortgage holders in Stockholm and Gothenburg since house prices are highest there, as well as younger households, households with only one adult and households with high income.
FI expects the stricter requirement to result in households borrowing less and buying less expensive homes, much like after the implementation of the current amortisation requirement. For the country as a whole, the stricter amortisation requirement is expected to slow the growth of debt by almost 4 per cent and house prices by approximately 1.5 per cent. In Stockholm, growth in house prices will slow by approximately 3 per cent. Households that do not reduce their debt in order to place themselves below a loan-to-income ratio of 450 per cent will increase their amortisation on average by approximately SEK 1,500 per month. The combination of some households borrowing less and others amortising at a faster rate will reduce the number of vulnerable households. The introduction of a stricter amortisation requirement for households with high loan-to-income ratios will thus help reduce the macroeconomic risks associated with household debt.