There has been a lot of talk about mortgage repayment requirements lately and some time ago it was relevant to introduce them but then it was realized that it is not really going in its current form. So there are a few heavy throws here and there – but what do the amortization requirements really mean and are we happier without them or with them?
Bank has had a proposal that there should be repayment requirements for mortgages
This proposal is that you always have to pay down your loan down to 50 percent of the value of the home. Loans with a loan-to-value ratio above 70% shall be repaid by at least 2% each year and below 70% down to 50% by at least 1%. The proposal is thus for people to become better at repaying their mortgages instead of paying nothing. It was intended to apply to new loans and would start on 1 August 2015.
Many have thought that this is a good proposal and even banks have come out and said that is not so stupid, which means that Swedes’ indebtedness is reduced and that the risk is reduced that we put ourselves in a bad financial situation. The problem is, however, that an authority like FI does not really have the law on its side and they have no right to decide how banks and other companies should act. As it is a somewhat tricky legal situation, FI itself has decided to abandon the proposal for amortization claims.
So there is no such proposal anymore and no one is forcing us to pay off our mortgages. The question is, however, what are the advantages of such a proposal and what are the disadvantages? I thought I would try to go through both sides a little and discuss a little how it would affect us ordinary people and our private finances.
FI has frightened the housing market
A first effect of FI’s proposal, which would start to apply on August 1, 2015, was that there was real momentum in the housing market. People wanted to try to do their housing deals and obtain loans before it became a requirement to repay, so suddenly it became more expensive to buy housing, as many wanted to buy.
Unfortunately, since FI had no right to impose such requirements on the banks, it only became apparent that they were shaking up the housing market without actually doing anything else. The housing market and housing prices are in themselves a fairly complex balancing act and one does not want to create large increases in price or price race. Right now, housing prices have become a little more political than desired, but as the amortization requirement is now being abolished, prices may start to fall again.
Benefits of mortgage repayment requirements
There are quite a few who do not repay their mortgages at all at present. At Bank, about 29 percent of mortgage customers with a loan-to-value ratio above 70% do not repay and almost half of those with a loan-to-value ratio of between 50 and 70%. At SEB, about 40% of customers do not pay off and these also have a fairly low loan-to-value ratio. Handelsbanken and Nordea have about 25 – 33% who do not repay their loans.
The disadvantage of not paying off your mortgage is that you are constantly sitting there with a fairly large debt and it does not decrease in size. It may not cost so much each month in interest to have this loan but if the interest rate goes up a lot it can be expensive. Amortizing on your mortgage is an investment you make for the future, and that means that lower up does not have to pay as much.
Mortgages on mortgages reduce the risk in the private economy and it is good for Swedes’ debt in general. It has long been talked about (from FI’s side and also elsewhere) that we have too high debt and that this is a risk and something we must try to address. The amortization requirement was intended to be one of the measures against this.
Amortization as an investment
As I said, repaying your mortgage is a type of investment. You can invest your money on stocks or funds and thus get a return, but another type of investment is to pay off your loans. Instead of making money, you save money by having lower interest costs, etc. Your installments on the loan should therefore always be seen as an investment and not just as an expense.
When you pay off your loan you get a lower interest rate and the loan decreases. Of course, it is good to get your loan down even though your monthly cost may not be that high. The less you have on the loan, the less the risk that the interest rate rises a lot and means that you have to pay very much every month.
Disadvantages of mortgage repayment requirements
There are many who do not repay their mortgages and then you can imagine that there is some good reason why they choose not to do so. The big reason is probably that there is no greater need for amortization together with the fact that you want to release the amortization in your monthly budget.
Every month you have to pay interest on your loan and if you only pay interest and no repayment, the monthly cost is clearly lower. It attracts more to get a low monthly payment right now than it attracts to pay off the mortgage and get a slightly lower interest rate later on. Many people who have a little worse finances may also feel that it is interesting to have an amortization-free loan as it gets cheaper every month.
Being able to choose to run amortization-free has been a big advantage for those with slightly longer incomes as it is usually those who need to reduce their expenses every month. It will be more important for them to get a low monthly cost and not really as important if the loan becomes more expensive overall. It is these financially weaker ones that may suffer from the repayment requirements as this means that the monthly costs for a mortgage will be clearly greater.
For example, those who have a little worse economy are young people who want to buy a home or those who have slightly lower incomes and have less money left over. It should be pointed out that it is basically a good thing to repay your loan as the loan becomes cheaper overall and that the risk becomes less, but in reality it also becomes a requirement that you have more money in your monthly budget to spend on housing costs and the not everyone has it.
Amortization date when interest rates are low
Right now, the repo rate is extremely low (we have a negative interest rate even) and this means that mortgage rates are very low. If you do not then repay the loan but only pay interest, it will be a very small cost each month. However, when the interest rate is so low, it is a very good opportunity to repay your mortgage because you still have quite a lot of money left over.
In such a situation, one should try to save money in a buffer for the future when interest rates rise again. You should always put aside extra if you have variable interest rates to cope with the higher interest rates that will come sooner or later. It is also a very good way to repay your mortgage when investing in your own finances in this way. Take care when you have money over so you can be a little more restrained when the interest rate gets high instead.
No matter what you think of an amortization requirement, you can at least say that it was a pretty good time to introduce such a requirement. Interest rates are at a record low and it is very cheap to have mortgages. For example, Bank seems to have the plan to continue to recommend its customers to pay down to 50% of the loan-to-value ratio in the future, however, it is not entirely clear if this will be a requirement or just a general recommendation.