The Swedish Financial Superisory Authority (Finansinspektionen, FI) has determined that the loss of income due to Coronavirus constitutes "special grounds" necessary for lenders and borrowers to legally stop amortisation payments on loans.
The regulator has for a number of years sought to increase the amortisation burden to lower household leverage ratios, which surged in response to sharp rises in property prices over the past decade, leading borrowers previously on interest only or very low amortisation mortgages increaed their borrowings to fund discretionary spending on things such as cars, boats and holidays.
"The amortisation requirement is designed so that, under normal economic conditions, highly indebted households amortise their debt and thus increase their resilience," FI stated.
"The requirement has been designed in such a way that banks and borrowers can agree on an exemption from the requirement given special grounds. For example, households may find themselves in situations where their disposable income has unexpectedly decreased.
Erik Thedéen, director general, added: "The rules state that the banks may grant exemption from the amortisation requirement given special grounds. If the borrower loses income due to the spread of Covid-19, this qualifies as special grounds. This is FI's position, and we have made this clear to the banks. Due to the extraordinary circumstances, the banks may be generous in their application of the exemption."
According to the announcement:
- It is up to the bank and the borrower to agree on the details of the exemption on a case-by-case basis.
- The exemption should be evaluated on an ongoing basis.
- The exemption may be extended, depending on how the economy develops and the type of the event that affected the borrower.
- The exemption may apply for anywhere from 3 to 12 months, with the possibility of an extension.
FI also noted that banks "should be generous" in their application of the exemption in respect of self-employed persons.
Matching monetary policy
FIs actions come after Sweden's cental bank, Riksbanken, said last week that it would inject SEK500bn of 0% loans into the economy in order to defend liquidity - https://www.investmenteurope.net/news/4012377/sweden-riksbank-lends-sek500bn-banks.
The bank said earlier in its 12 February statement on interest rates that it did not foresee the repo rate rising above 0% until the first quarter of 2023.
Swedish mortgage borrowers often blend short and longer term rates. Currently, 5 year rates vary from around 1.3-2% according to Konsumenternas.se but specific amortisation requirements may vary from lender to lender, and borrower to borrower.
It is not yet clear to what extent mortgage rates could change in response to FI's statement on amortisation, but borrowers could see monthly costs of their mortgage loans fall to interest-only repayment levels.
InvestmentEurope has sought comment from the Swedish Bankers's Association on the possible effects this may have on its members.