Wednesday, September 25, 2013

Why pay back your mortgage if you don't have to? Borrowing money in Sweden

As you well know, if you read this blog, the saga of our endless search for a home continues. And that means I spend a lot of time reading the newspaper about the state of the housing market. And right now the Swedish central bank, the International Monetary Fund, and the EU central bank are all fighting with the Swedish government because, it the government thinks it is soooo stupid to pay back your damn mortgage.

At least that is what all of the finance experts in Sweden have to say. Would you be surprised to find that all of the finance experts are employed by the banks?

OK the theory is this:  It is silly to pay off your mortgage, ever. Better to invest that money in something else. The bank will get its money back when the house is sold. You pay interest on the loan. Everyone is happy. Because, as we well know well, housing prices only go up.

Lately there has been a change in tune, and the government is ‘encouraging’ the banks to ‘encourage’ their customers to amortize 25% of their mortgages. That is correct. Over the life of the loan, you are expected to only pay back 25%. That means, if you actually made a full downpayment of 15%, you are only amortizing on 10% of the actual cost of your house (yes, this does mean that housing costs are crazily inflated to reflect this fact).

Most of the Swedish central bank employees are all like ‘We shouldn’t FORCE people to pay back their mortgages, because sometimes people fall on hard times and if we force them it would not be good for the economy’

Yes, the banks are saying it is silly to expect people to pay back loans on a monthly basis.

We went to one meeting with the bank that is starting to encourage 60 year amortization and was told ‘don’t worry, probably when you get to 50% we can talk about stopping amortization’ and I was all ‘you Swedes are crazy!’ I mentioned a 30 year payment plan at our first mortgage meeting with one bank. Let’s just say that subject won’t come up again.

The good news: The good news is that due to the crazy structure, you can amortize at an accelerated rate without any penalty. At least that is what they say.

The bad news is: Seriously, no one is paying back their loans.

So is Sweden the only country that loans out hundreds of thousands of dollars and does not expect repayment until the house is sold? I have read that Finland has 30 year loans, and I know even crisis country Spain does as well.

Are there other regions where they think ‘amortize smamortize?’

Because everyone seems to look at home equity like it is something that should be used long before you die, they keep giving these huge mortgages to people in their 60s, and I am left, once again, mind boggled and rather terrified by the whole thing. 


  1. I agree, it all sounds crazy to me. It doesn't add up!

  2. It continues to amaze me as well. We do pay off our mortgage as well at a 50 year amortization and our bank lady was all "whoa, you crazy people" when we talked about increasing our payments. I wonder where this mind set comes from? For me it is simple math. You increase your equity and decrease the effects of an increase in the interest rates - of course you should pay off your mortgage.
    What really annoys me is that we were looking at buying an apartement the autumn of 2008 when the interest rates rose quite dramatically and no one knew where they were headed - and then the housing market slowed down a lot. Six months later when the interest rates had sunk back to the low numbers Swedes are used to everything was the same again. I just want to scream "If you couldn't afford to buy then, you can't afford to buy now"

  3. Oh don't get me started on the interest rates. At one bank they were like 'now we have calculated that you can afford payments at our 'worse-case scenario' which was 6.5%. I was like 'really, so I cannot lock in a rate, but you do not expect interest rates to rise above 6.5 percent in the next 30-40 years? That's your worst case? That's supposed to make me feel confident about this arrangement? Fine, she smiled, and upped it to 8%. And I made sure we still had wiggle room there. But seriously, this means there are people who borrow the max and go by the 6.5% and that crazy budget the bank goes by.

  4. Yup. This is good for the banks, and not so good for the people. The answer to why they give out loans is actually really easy: because it's a very certain investment - for them. As long as people just pay interest and don't downpay on their loan, it's actually a great deal for the bank - they own the house/apartment and the people who "bought" it actually rent it. If they for some reason can't pay their rent, they have to sell, and since the housing market is as stable as it is, the bank is most probably never ending up with a problem. (In the big city areas, of course. In the outskirts there's a completely different story.)

    I bought myself a small house (as we Swedes say, a little "torp") from the beginning of the 1900s three years ago. I bought it cheap, and am paying off the loan regularly, have actually prioritized doing that over traveling and stuff. In three years I've paid of half the sum. My bank seems to think I'm completely nuts, I myself think I'm like the smartest person ever. I like the thought of actually owning the house for real in a couple of more years. But then again, my parents aren't real Swedes. Might have something to do with it.

  5. Interesting article. I wish I were in Sweden.

  6. Very interesting, but 'm a bit confused. My hubby and I are looking at houses in Sweden, We see house prices and than there is a "Pantbrev" amount. Is that now something that comes on top of the asking price? So it's asking price plus pantbrev what the buyer pays?

    1. The pantbrev is similar to the deed in English should be equal to the value of the mortgage. You will need to pay a percentage of the difference between the current pantbrev and the one you will take out. So if you borrow 3 million and the previous owner owes 1.5 million then you pay a percentage of 1.5 million for your pantbrev --

  7. I am swedish, totally don't understand this phenomenon and made certain to pay off the loan so that I now own my house. There seems to have been a big shift in mentality somewhere between my grandparents generation (where more or less noone wanted to be in debt, be it to banks or others) and my generation, where people gladly borrow sums they can't pay back. I am just waiting for the bubble to burst again, like it did in the 1990:s.

  8. A major reason that, unlike most of the rest of the world (including Canada, where I am originally from), Swedes don't pay down their mortgage is that mortgages here are tax deductible. The result is that the government is giving you acccess to money for free. In the current rate enviroment we are not only not paying down any of our mortgage (except the "topdel", which we have to by law) but will also shortly be increasing our mortgage and investing the proceeds. Our current rate is 2%. Apply the 30% mortgage reduction and the effective rate is 1.4%. Invest in an ISK and the tax rate on investments (capital, appreciation and income combined) is 0.7% per annum. So, everything I make above 2.1% on my investments is pure profit using the bank's money.

    The moral of the story is that if you think you can earn more than 2.1% on your investments (which is very easy to do long term, though on a short term basis, while rates remain historically low, is another question) then of course Swedes should not amortize any of their mortgage. If you are very risk adverse, then feel free to amortize (as is legally required in most countries and made sense when mortgage rates were 8%+).

    The one proviso to the foregoing - if you don't amortize you really should save, and invest, the amount you otherwise would have amortized. Then, if rates go up dramatically, you can cash in your investments and pay down the mortgage by lump sum.

    1. Bingo, finally someone has got it. Sweden is a totally unfair, unequal society. Borrowers are rewarded by paying lower tax rates than people who have no debt. The poorest members of society (who can't obtain credit) are subsidising the spendthrifts. The Swedish economy is a gigantic Ponzi scheme. Fact.