The amortization requirements, explained

Background to the amortization requirements

The basic principle of loans is that one happy day they will need to be paid back. This was not really the case in Sweden up until 2016, when first amortization requirements were introduced. These requirements were built around so called loan-to-value theories and were meant to increase resilience to macroeconomic shocks. Simply put the requirement put different rules of amortization depending on how big part of the value of a property was financed with loan. Yes, it only happened in 2017 (regulation took force on 1st of January 2017), which means that before 2017 one did not really need to pay back the mortgage in Sweden.

But the regulations of 2016 did not cool the market off as lawmakers have hoped. This resulted in amendment to regulations where loan-to-income ratio was introduced.

The amendment required new mortgagors with mortgages that are greater than 4.5 times their gross income to amortise at least 1 per cent of the debt in addition to the 2016 amortisation requirement. The aim was once again to increase the Swedish households’ resilience to shocks. The amended regulations entered into force on 1 March 2018. 

Want to take a mortgage in 2019, but not sure what the rules are? 

Amortisation regulations in Sweden today are quite simple once you understand where to start. 

Let’s begin with loan-to-value regulation:

% of property value that is financed with load 

Amortisation of loan per year 

85*%-70%

2%

70%-50%

1%

<50%

Not mandatory

In Sweden one can't lend more that 85% of property value, that is why this is the highest number.

Example:

  • You have a loan of 2,4MSEK and your property value is 3MSEK. This means that your loan-to-value ratio is 80% (2.4MSEK/ 3MSEK = 80%)
  • You are then required to pay back (amortise) 2% of your debt every year until your loan-to-value ratio reaches 70% = 2.1 MSEK. (3M*70%=2,1M)
  • This means that you will pay back 48 000 SEK per year, equal to 4 000 SEK per month. 
  • In roughly 6,5 years you will reach <70% in loan-to-value ratio and can amortise 1% per year. ((2,4M-(48 000*6,5))/3*100%=69,6%)

The loan-to-income amendment to regulation requires us to add one more dimension to our loan and amortisation calculations - income. You always look at gross income here, i.e. before tax. 

% of property value that is financed with load 

Amortisation of loan per year 

Loan <4,5*yearly gross income

Loan >4,5*yearly gross income

85*%-70%

2%

3%

70%-50%

1%

2%

<50%

Not mandatory

Not mandatory

Example:

  • You have 35 000 SEK in monthly gross salary, which results in 1,89M SEK in allowed loan without extra amortisation (35 000*12*4,5=1,890M)
  • You have a loan of 2,4MSEK and your property value is 3MSEK. This means that your loan-to-value ratio is 80%.( 2.4M/3M*100=80%)
  • You are then required to pay back (amortise) 3% of your debt every year until your loan-to-value ratio reaches 70% = 2.1 MSEK. (3M*70%=2,1M)
  • This means that you will pay back 72 000 SEK per year, equal to 6 000 SEK per month (2,4M*3%/12=6 000)
  • In roughly 4,2 years you will reach <70% in loan-to-value ratio and can amortise 2% per year. ((2,4M-(72 000*4,2))/3*100%=69,92%)

Important to remember that these rules are valid for loans taken or increased after 1st of March 2018. 

If you have any questions or need support to calculate your potential costs, do not hesitate to contact us Den här e-postadressen skyddas mot spambots. Du måste tillåta JavaScript för att se den.

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