The coalition government of Sweden reached an agreement on a proposal that would require homeowners to pay off principal amount on new mortgages. According to a recent report from Reuters, the goal is to cool off the already overheating Swedish housing market.
Recent Swedish survey showed that about 70 percent of the country's home owners have interest only mortgages in place. Under this scheme, they are not required to pay off any amount of the principal of the loan obtained. Also, the loan-to-disposable income ratio of the country is at 170 percent, amongst the highest in Europe. This has raised red flags with economists, urging the government to take steps in controlling loans and borrowings to prevent any further issues down the road.
Under the forged agreement, a new mandate would be provided the Swedish Financial Supervisory Authority (FSA) to require property owners to pay the principal on their new mortgages. This though would exclude newly constructed homes, would be enforced by May 1, 2016.
Previously, the FSA had recommended the payment of at least 2 percent of the mortgage principal per year until the loan reaches 70 percent of the property valuation. It also recommended that the principal be paid off 1 percent a year until loan to value ratio is at 50 percent.
In a report from The Local, Swedish Finance Minister Per Bolland was quoted saying, "We have held talks with center right parties and also with the Left. Now we are agreed that we should proceed so that the Financial Services Authority (FI) can impose amortization requirements."
He added that there would be exemptions, saying, "To reduce the possible impact on residential construction, exceptions should apply, for example, when purchasing newly built homes. Exemptions should also be granted in certain special circumstances such as unemployment, illness, divorce or bereavement."