This is an opinion piece in Dagens Nyheter. The author is responsible for the opinions in the article.
As of April 1st, the mortgage cap will be raised from 85 to 90 percent. It is a very welcome measure, which will make it easier for many first-time buyers to enter the housing market. At the same time, taking out housing loans after the original purchase of the home – so-called supplementary loans – will be more strictly restricted than before. In the future, the sum of the original loan (minus the repayments made on it) and additional loans may not exceed 80 percent of the home value. In addition, in the event of general price increases, a new review of the property value may only take place after five years (except for a significant change in the property value for reasons other than general price developments).
By limiting additional loans, the government wants to prevent households from taking out new mortgages when property prices rise and the loan-to-value ratio falls. They also want to limit the ability of households to mortgage the house for purely consumption purposes (such as buying a car), which the government says could lead to overconsumption.
However, there is no empirical support that homeowners in Sweden use the house as an ATM for pure consumption or mortgage the house to an extent that endangers financial stability or their own finances. It is primarily consumer loans and other debts taken out without collateral in the home that lead to consumers ending up with the Swedish law enforcement agency. The problems that the government wants to avoid with the new mortgage rule are therefore most likely fewer than those that the regulation creates instead – and they are several:
When a household buys A house with no need for renovation: With the new proposal, the household can borrow up to 90 percent of the house value. That’s good. Alternatively, if the same household buys a cheaper, similar home that needs renovation, they can also borrow up to 90 percent of the home’s value. The loans that the household then takes out to renovate the house so that it has the same condition and value as the house without the need for renovation, on the other hand, together with the original mortgage, may only reach 80 percent of the value of the house. It doesn’t matter that houses in need of major renovations can be significantly cheaper to purchase than correspondingly renovated houses and therefore initially represent a lower risk both for the household itself and for financial stability.
With this restriction, those who need to renovate their home after buying a home must resort to unsecured loans, which are significantly more expensive than home loans, or initially take out a larger home loan than they had originally planned. Households who do not want to renovate the house with a blank loan or who want to borrow up to the mortgage limit when purchasing the house must repay the original loan for several years before they can finance the renovation with new mortgages. The following calculation example illustrates the latter:
We are surprised that these problems are treated so neglectfully by many reputable remittance providers
Let’s assume that two Economically equivalent households buy identical houses next to each other – one in top condition for a price of SEK 6 million (Household A) – the other in need of roof renovation for SEK 200,000 for a price of SEK 5.8 million (Household B). With a mortgage cap of 90 percent, household A can borrow SEK 5,400,000 and household B can borrow SEK 5,220,000 in connection with the purchase.
Immediately after moving in, Household B would like to renovate the roof for SEK 200,000 so that it is of the same standard as Household A’s house. But now suddenly a maximum loan-to-value ratio of 80 percent applies. 80 percent of the purchase price is SEK 4,640,000 for household B.
In order for household B to finance the roof renovation with a home loan of SEK 200,000, the loan taken out in connection with the purchase must first be repaid to SEK 4,440,000 (4,640,000 – 200,000), i.e. a full SEK 780,000.
With an annual amortization of 2 percent, it would be 7.5 years. Household B can hope that property prices will rise so that they can request a loan-to-value ratio review, but this may only happen after 5 years.
The calculation example shows with It’s abundantly clear that households with exactly the same financial circumstances and the same ability to repay are treated completely differently depending on whether you buy a home with or without renovation needs – and that’s no small discrimination we’re talking about. It will also affect those who do not have enough equity to buy new or fully renovated homes, including family-forming age households and many with immigrant backgrounds. Necessary maintenance measures can also be postponed into the future, which entails the risk of insurance claims and more expensive future renovations.
The new regulation will also make it more difficult to make the energy efficiency improvements that we are required to make in the future under the EU Energy Performance of Buildings Directive (EPBD). Homeowners who live in buildings with the lowest energy efficiency are particularly affected. In addition, the purpose of the root deduction is counteracted, which will also affect an already heavily scrutinized construction industry – not least towards smaller construction companies/carpentries for which the root deduction is important.
We are surprised that these topics are treated so neglectfully by many high-ranking reference bodies and that they fly completely under the radar of the media. There is a much better alternative to the government proposal that also reduces the risk of mortgage-financed overconsumption (if you believe this is a problem despite evidence to the contrary). It states that unsecured loans taken out during renovation may be converted into housing loans with a possible loan amount of up to 90 percent if a receipt for the renovation can be presented. Such a model would also treat equivalent households differently, but only for a limited period of time and with significantly fewer negative consequences.
Facts.Additional loan
When taking out a mortgage, the bank determines a so-called amortization base value. It determines what the payback will be and what the initial loan-to-value ratio will be.
According to the current rules, the loan-to-value ratio (loans against collateral in the home) can be a maximum of 85 percent – the so-called mortgage upper limit.
The cap applies to both mortgages taken out at the time of home purchase and loans taken out thereafter.
On April 1, the mortgage cap will be raised to 90 percent under a new proposal. However, the new higher cap only applies to actual purchases. According to the proposal, an 80 percent limit will instead apply to loans taken out as security for the home after the home has been purchased.
Source: SBAB
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