A stable, well-functioning financial market for allA stable, well-functioning financial market for allIncreased household lending - a risk analysis
Lending to households has risen at a high and fairly steady rate – about 10% per year – during the past few years. The main increase has been in mortgage loans. The growth has been fuelled by historically low interest rates leading to rising house prices and, consequently, a greater need for financing. The sharp growth in lending has caused Finansinspektionen (FI) to review the banks' lending activities and to assess the possible consequences of this development for FI's financial stability targets and for maintaining a satisfactory level of consumer protection.
FI's assessment is that lending to households does not pose a threat to the banks' financial position. Any potential threat is also minimized by the current low inflation and the fact that rising interest rates normally coincide with a strong economy. At the same time, the low inflation means that loans are not "automatically amortized" as a result of a reduction in the value of money. Since the banks impose low demands in terms of amortization payments, this risks leading to a general increase in household indebtedness.
Customers should calculate the effects of a rise in interest rates and of having large debts over a long period. For example, for a household with only variable loans, a repo rate of 6.5% – which is not all that improbable during an economic boom – would entail an interest rate of 8% and a 130% increase in interest expense. For a SEK 2 M mortgage at variable interest rate of 3.5%, this would entail an increase from SEK 4,100 to SEK 9,300 per month. Additionally, there is the risk of falling house prices.
Against this background, it is important for FI to monitor developments and, if necessary, take measures to prevent problems. FI intends to introduce a more stringent information requirement in its general guidelines covering two areas in which credit provision by banks can be improved:
- The banks need to ensure to a greater extent that the customer will be able to bear the interest expense even at interest rates considerably above the current level. Otherwise, it is easy to overestimate the customer's ability to manage his burden of debt.
- The banks must explain more clearly to customers how their household finances will be affected by higher interest rates.
The banks should review their information policy as quickly as possible since information is particularly important in view of the current low interest rates.
