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Sign of the Times: Tightening Mortgage Rules in Europe

posted by Jason Kilborn

EuroMortgageLoanTwo stories in today's world news caught my attention because they were both related to rising consumer debt and tightening mortgage rules. 

First, Sweden is proposing a particularly aggressive approach to reducing the weight of mortgage debt on consumers' balance sheets. The new accelerated amortization rules really struck me from a comparative US perspective: Swedes borrowing more than 70% of the value of their homes would have to pay the loan down by 2% a year (that's 2% of the principal) until the LTV falls to 70%, then 1% of the principal of the loan each year until LTV reaches 50%, the desired level. Wow. In the 15 years that I've been wrestling with a variety of home mortgages, I don't think I've ever paid 2% of the principal (given the back-loaded amortization schedule of most standard US home mortgage loans). To make matters worse (better?), the Swedish central bank is also considering grabbing onto the third rail of US tax reform--reducing tax deductions for mortgage interest. These are pretty aggressive moves to cool off the mortgage market and bring down consumer leverage, and they stand in stark contrast to efforts in the US and the other country in today's news ...

Ireland. Politicians there are deriding the notion of a 20% downpayment requirement as "unfair." This struck me as really odd. Maybe I'm officially "old" now, but I remember very well when a 20% downpayment was the norm in the US as well. This seems like a sensible and responsible way to cool off overexuberance in the mortgage markets (on the supply and demand sides), of the kind that contributed to the Great Recession. Maybe I just don't understand a key difference. The politicians were also quoted as advocating "longer-term, fixed mortgages, or 10-year mortgages." If these are the same thing--i.e., 10 years is "longer term"--then I'm comparing apples and something very unlike apples. In the US, a 15-year mortgage is quite short-term, and I understand that 40-year mortgages are the norm in pumped up markets like California. With an average home price in Dublin now around €340,000, I wonder how any middle-class person could afford a 10-year, US$425,000 mortgage at virtually any rate.

Apparently, the mortgage markets in Europe are very different from each other, even in places as geographically close as Sweden and Ireland. And mortgages obvious play a huge role in consumer debt and potential overindebtedness. This seems to be growing in importance as a key issue in consideration of how to dea with consumer debt and insolvency around the world.

Euro home loan image courtesy of Shutterstock


"In the 15 years that I've been wrestling with a variety of home mortgages, I don't think I've ever paid 2% of the principal (given the back-loaded amortization schedule of most standard US home mortgage loans)."

From a UK perspective, a little playing with a spreadsheet shows that a standard (in the UK, at least) 25-year repayment mortgage will pay 2% of the principal in the first year at any interest rate less than about 5.2%, so really this isn't particularly harsh. Are US mortgages structured that differently? (For a 40-year mortgage the threshold is hit at 1.1% interest.)

10 years isn't the length of the mortgage. It is the length of the initial fixing. Like the UK, Ireland has a predominantly floating rate market.

In Sweden, household debt to income is over 170 %. Many borrowers were terming out mortgages, to make monthly payments affordable and even then only paying interest. The rule change is designed to stop that.

In Ireland, LTV and Loan to Income proposals (not law just yet) are to stop a deterioration in lending standards (income measure) and reduce the damage if/when a mortgage defaults (LTV measure). The political/property lobby tends to ignore the (Q2 2014) 17% mortgage arrears rate from the last bubble.

Covered bonds have been issued by Irish banks providing longer term financing of mortgages. Mortgage bond (20-30 yr) financing like Denmark could be easily be introduced but would require repossessions within 6 months of arrears occurring. Don't think many politicians will be calling for that in Ireland.

Rich--I wish my mortgage rates had been closer to 5.2%, and the more recent rates have been pretty good, but the standard US mortgage stretches over 30 years, not 20 or 25. In California, I don't imagine any 40-year mortgagor could get anywhere near a 1% loan.

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