For a long time, an amortization claim has been discussed and it has been ready to club before, but has since been put on ice for one reason or another. However, it has been clear that many people think that measures such as this are very important in order to be able to handle the Swedes’ indebtedness and therefore the requirement has been kept alive. So now it has finally become a reality.
Today, the proposal has been pushed through when the government and the alliance parties agreed on a solution. However, it takes until June first, what we know at least right now, before the claim starts to apply. You can thus buy a new home and take out a mortgage before and then release the repayment requirement.
The very requirement is that you have to pay off (amortize) your mortgage, instead of, as many do today, only pay the interest each month but not pay on the loan and thus reduce its total size.
The repayment requirement says that you have to repay your mortgage every year with two percent of the loan amount as long as you have a loan-to-value ratio that is above 70 percent. When you get down to 70 percent, you need to repay at least one percent of the loan amount annually until you have a 50 percent loan-to-value ratio. After that there is no longer any requirement for amortization.
Some things that are important to know are; First, this requirement only applies to new mortgages. If you already have a mortgage loan before then this is not affected and you do not need to start repaying more according to the new rules. As I wrote above, the amortization requirement does not come into force until the first of June this year and before that you can borrow without worrying about it.
Secondly, people had previously said that newly built housing would be exempt from the amortization requirement without any limit, which means that if you bought a newly built house as the first buyer, you would have to drop the requirement now and always. However, they have now backed up at this point and instead you will be given five years with no amortization requirements. After that, and then you have to start repaying your loan according to the rules, if you haven’t already.
Another thing is that it is possible to get some deferment from the amortization requirement if you happen to suffer from illness or unemployment. You may have to waive the claim for a certain period, which may not yet be determined. It is only temporary but the idea is that you should have the opportunity to get back on your feet and get the economy back on track. It is also the case that forest and agricultural properties are exempt from the amortization requirement.
The idea of the repayment requirement in general is that they want a tool to counteract the high level of indebtedness in the country. We have too high debt ratios in relation to our income and it is worrying because it can lead to economic crisis – in a bit similar to the US financial crisis that built on the so-called subprime loans.
In addition to this requirement, it has been discussed that we need further measures to prevent debt, such as reducing the interest deduction for loans or setting up a debt quota so that one can only borrow a certain amount of money based on their annual income. However, these measures are not particularly close to being implemented, but may be relevant in the future.
In particular, the repayment requirement means that people who want to buy a home will receive a higher monthly cost for their loans. Every month, you have to pay down the repayment (installment on the loan) plus the interest cost. At present, many people pay very little or nothing at all, which means that they only pay the interest each month.
In the long run, if the idea is to pay off your entire mortgage (which may not happen so often), then this would make the loan much more expensive as you constantly pay interest on the same high loan amount that never decreases. But if you look at the cost per month, it will be clearly lower if you do not have to amortize for example USD 5,000 a month. If you only pay the interest, then the total cost for each individual month will be around USD 3,000 instead of USD 8,000.
Since it usually makes quite a small difference in the short-term (some years) on the interest rate to repay on their mortgage, it is common for people to simply refrain from repaying if it was now possible at the bank where they have their loan. Many banks have offered the opportunity to avoid repayment. However, there will be a change in this from this summer.
If you had previously thought about borrowing and not repaying, you would have been able to receive a significantly lower monthly payment than with the repayment requirement, which in principle meant that clearly more expensive housing could be accommodated within your monthly budget. Maybe with the old rules you could easily buy a villa for USD 4,000,000 and repay little or nothing on the loan.
Now that you have to repay a certain percentage of the loan amount annually, it becomes clear more to pay each month compared to having an interest-free loan. The repayment requirement says that you must pay at least 2 percent of the loan amount annually and if your loan is at USD 4,000,000, then 2 percent will be approximately USD 6,670 a month.
This means that you must have an economy that can handle a monthly cost of the mortgage, which is around USD 10,000 instead of as before when you only needed to manage maybe around USD 3,500 per month. That’s a pretty big difference. In practical terms, it probably means that many people have to look at cheaper housing to afford the monthly cost.
In a way, you might think that it is unfair that people who already have mortgages should be able to enjoy a more or less amortization-free loan and then get away with clearly lower monthly costs, but that is simply not true either. You have to remember that it is always recommended that you repay your mortgage. It is an investment that reduces your interest expense and your personal financial risk.
Most people have a variable interest rate on their loan and as long as the interest rate is low it is quite nice. Then you might not worry too much about your interest costs and the possible problems of never repaying your mortgage. However, when interest rates go up and become expensive, such as 4, 5 or 6 percent, it becomes clear, however, that you have a large mortgage loan and that you have failed to repay it. Then the interest cost becomes expensive.
You should always remember that it is important to have an ok margin in your monthly budget so that you can afford your new accommodation. Make sure to be careful and honest with yourself when making a calculation to see what price level of accommodation you can afford in your current economy. Also, keep in mind that today the interest rate is very low and that within a few years it will probably rise some. If you choose a variable interest rate on the loan, you should expect to be able to afford a cost that is based on an interest rate that is several percent higher than it currently is.
Something you should also keep in mind is the extra cost if you cannot afford to pay 15% of the value of the home in cash. You can have at most 85% loan-to-value ratio on your home and the remaining amount must be found elsewhere. For a loan of USD 4,000,000, the cash contribution will be USD 600,000, which far from anyone can submit on a straight arm.
To solve this, it is then common to take out a loan without collateral for at least part of that amount. It has been classically referred to as a top mortgage, while the second part is a mortgage and it is basically a regular private loan that is clearly more expensive than a mortgage. This loan also has an amortization and interest that must be included in the total monthly cost of the accommodation. Be careful when making your calculation so that you think about all the costs that will be added.