Thought to combine two important and interesting news in this post. In the middle of last week, a new message about the repo rate came from the Money Personal Loan, where they decided to keep the interest rate at -0.50 percent. There are some interesting things to discuss. Furthermore, I will also go through the debt ratio ceiling, what it is and why it is relevant right now.
The Money Personal Loan’s decision on the repo rate
You probably know that we have had a negative interest rate for quite some time now. It stands at -0.50% right now and that did not change in the latest interest rate announcement either. It was no big surprise that the interest rate remained low, but some important news came from the latest monetary policy meeting.
The Money Personal Loan announces that inflation, which they have struggled to try to get going for quite some time (and whose target is 2%), has been a little dampened in recent months and this has made them worried. Now the Money Personal Loan is questioning whether they will really be able to reach their target of 2% inflation as quickly as they had previously thought, and therefore they intend to adjust the repo rate forecast as well.
They say that there are clear opportunities to lower the interest rate further in the future if needed and above all it seems that the interest rate will remain at the same low level for a longer period. Earlier forecasts said that interest rates would start to rise next year but now they have instead said that there will probably be no increases until early 2018. The old forecast said interest rates would be -0.32% at the end of 2017 but now they have changed so that it says -0.56% instead. This is a lower interest rate than we currently have.
The reason why you have become more cautious in your forecast and believe in a slow rise is, as I said, that inflation has stopped a little more than expected. Sweden’s economy is generally quite strong, but the outside world is also affecting and there it is slowly recovering from the economic crises that have been.
Does further interest rate cuts really have any effect?
The Money Personal Loan has had interest rate cuts as weapons now for a good while now and it seems to have worked to some extent, but of course there is nothing that on its own can get inflation to where you want. However, after we have had a negative interest rate for as long as we now have, many people start to doubt that further reductions really have any major effect.
The very idea of lowering the repo rate is that you should stimulate people / companies’ finances so that it becomes cheaper to take out loans and that you get more money to trade for or invest. This, in turn, will give inflation a boost. However, we have now had a negative interest rate for a long time and for private individuals, further reductions no longer make a big difference.
When the repo rate is now reduced for the time being, it has no real effect on the mortgage as the banks no longer lower their mortgage rates at the same rate as the interest rate is lowered. When the interest rate was higher one could see a clearly stronger connection and then the mortgage rates could often be lowered as much as the repo rate was lowered. However, this is no longer happening in this squeezed interest rate situation.
One theory is that we rather lose out on having negative interest rates
In addition to the loans, the repo rate also affects savings rates. We have cheap loans but at the same time we basically do not receive any interest on our saved money. At the same time, the banks themselves receive negative interest on money they have deposited with the Money Personal Loan and it costs them. The banks do not dare to charge negative interest on savings money for us ordinary savers as it certainly leads to people withdrawing their savings money or changing bank, so they can not do so much for the loss straight away.
The only thing they can really do in the long run is to try to earn their losses again in another way. This may mean that it becomes more difficult to bargain on mortgages and get a good interest rate or that the banks focus more on raising money in other areas where it is easier to make a profit. On the whole, it is probably ordinary savers / private individuals who are allowed to take the cost in the end.
If there is no direct positive stimulus by lowering the repo rate anymore and we also in time begin to pay for the banks’ increased costs, it will not immediately become a profit deal for neither the Money Personal Loan nor us ordinary savers. Of course, many people appreciate that it is cheap to do with mortgages, etc., but you must not forget about the other effects.
Debt ratio ceilings are starting to become current
In its press release, the Money Personal Loan writes that it will be increasingly important to look at different types of measures to reduce Swedes’ debt now that it is so cheap to borrow. Otherwise, the risk is that we take too many and too large loans in relation to our income. A first such measure was the repayment requirement that came last summer, which assumes that all new mortgages must always be repaid down to a 50% loan-to-value ratio.
Another proposal that has been up for some discussion has been a so-called debt-to-income ceiling, which is basically a maximum limit on how much you can borrow in total in relation to your annual income. The very reason is that you can at most borrow a certain number of one hundred percent of your annual income. Stefan Ingves has previously proposed that a maximum of 400% of his income can be borrowed after tax (disposable income). This is a pretty tough requirement that would limit many.
There is no concrete proposal for this measure in the past and it is not that there will be such a rule in the near future, but in fact at least two of the country’s major banks have chosen to voluntarily introduce their own debt quota ceilings. SEB and Swedbank have both introduced rules that at most can borrow up to 500% of their annual income before tax.
Their debt-to-income ceiling is clearly more generous than that suggested by Stefan Ingves before, as it is 500% instead of 400%, but the big difference is that the banks count on income before tax instead of after tax, which does quite a lot.
Simple calculation example
If you count on it a bit simply, if you have SEK 25,000 in monthly salary before tax, you can get an annual salary of SEK 300,000 and 500% of this is 1.5 million. In other words, you can borrow SEK 1.5 million with such a salary. Then you can also add a cash deposit of 15%. This means that you can buy a home that is sold for a little more than 1.75 million as long as you have some money saved for the cash contribution.
If, instead, you had calculated from Stefan Ingve’s example of 400% of disposable income, you would have been able to borrow around SEK 840,000 with the same monthly salary of SEK 25,000. That’s a pretty big constraint. Fortunately, there is no concrete proposal for a debt quota ceiling with these rules. We do not yet know if a debt-to-income ceiling will apply to everyone and how it will be designed, but it will probably come with time if not all major banks themselves face something similar.
What you should keep in mind is that if you are two who apply together, you each have a salary to count on. If you both have SEK 25,000 in salary before tax, you can thus borrow 1.5 million each with Swedbank or SEB and thus get a loan of around 3 million together. Then, of course, you can be limited by other things that mean you can’t borrow as much, but at least not by the debt-to-debt ceiling.