Risks to the financial system as a whole are low but the high loan-to-value ratio of mortgages is a cause for concern. These are the conclusions of a home loan survey commissioned by Finansinspektionen.
As home loans make up a large proportion of total household debt, the mortgage market is important for both financial stability and consumer protection on the financial market. Given this, FI commissioned a comprehensive survey in November 2009 of lending provided by financial institutions. FI also looked at a random sample of just over 6,800 newly granted mortgages.
FI concluded that the market generally works well. Ability to pay is the key criterion and institutions generally apply conservative calculations. Most households would be able to cope with a significant increase in interest rates.
Risks to the financial system as a whole were considered to be low. Stress tests indicate that it would take very high interest rate levels or drops in income combined with significant falls in prices for the banking sector to be vulnerable to credit losses.
However, FI does feel that there is reason to consider new regulations concerning loan-to-value ratios. Even modest price falls on the housing market would push a number of households into negative equity. FI feel that current loan-to-value ratios leave insufficient margins and create unnecessary risks in the system.