How does Swedish mortgage work? How to buy without a mortgage?
Most of this post can be safely skipped by the people who looked at the Swedish apartment prices and thought “yeah, I’ve got that money ready”. If that's you, scroll all the way down to ‘What if I don't need a loan’. For the rest of us mortals, the path ahead lies through a bank.
“Lånelöfte”
To participate in a bidding process (which will be covered in the next post in this series) or to buy an apartment directly, it’s necessary to have a “promise of a loan” document from a bank. The document says that the bank will loan up to X SEK, with the condition of Y down payment provided, given that the monthly fee for the apartment bought doesn’t exceed Z SEK. Usually it has a validity period of three months.
In my case, the real X, Y, and Z ended up a bit higher than stated in this document, but the bank approved the loan anyway.
Factors important for getting a lånelöfte (assuming the applicant is employed):
- the most important one: having steady income. The best thing to bring is a contract of permanent employment. Its permanence (keyword: tillsvidareanställning) is even more important than the exact salary listed in it.
- the currency of the income. Some banks will flat out refuse to give a loan if, for example, the salary in the contract is expressed in Euros and not SEK. Some also tolerate DKK and NOK.
- having passed the probation period and/or having worked at the current place of employment for more than half a year (some banks prefer a full year).
- not having other debt (or at least not a large one) — the bank will do a credit check.
- not having payment defaults (betalningsanmärkningar) — forgetting to pay any bills is not a habit that banks appreciate.
- not having more dependants and cars than the bank thinks feasible to support.
What the bank does is it estimates the applicant’s expenses and checks whether he or she would still be able to pay off the mortgage if the rate on it increased (e.g. to 7% instead of present day’s ~3.5% which was a jump from ~2%). This is one of the reasons that the monthly fee for the apartment is included in lånelöfte, and why the banks also want to know whether you have a car. Here's a page on Swedbank's website that shows some of their approximations of living costs:
Mortgage is routinely given out for life (e.g. for 50 years), so the monthly payments to the bank can be something like 3300 SEK (after tax return) for an apartment that was bought for around a million. Apartment ads are often accompanied by calculators that put together amortering (paying off the body of the mortgage), ränta (paying the rate on the mortgage), and månadsavgift (what it costs to live in the apartment).
How much money will the bank give?
There are two important numbers that help gauge the size of the loan and the down payment.
The first magic number is ‘15%’. Generally speaking, to get a mortgage, one should have 15% of the apartment cost. But the truth is that some banks (not all) will gladly give another loan to cover that. Of course this additional loan won’t have a rate as low as a mortgage, but technically it is a way to buy an apartment without having 15% of its cost upfront.
It can also go the other way though. If a bank feels that your income is not high enough, they might require a larger down payment. Same if you’ve only been in Sweden for a year or so (anecdotally I’ve heard of 30% required for this case).
The second magic number is ‘4.5’. As a rule, the maximum size of the mortgage is 4.5 × yearly income (assuming that’s the only loan you have). But the only thing that really changes for a larger sum is the required yearly amortization.
Required yearly amortization
According to the law (since 2016), if there’s still more than 50% of the original cost left to be paid off on a mortgage, it must be amortized every year.
0..50% of the mortgage left: 0% must be amortized yearly
51..70% of the mortgage left: 1% must be amortized yearly
71..100% of the mortgage left: 2% must be amortized yearly
In addition, if the size of the loans is greater than 4.5 × yearly income, +1% must be amortized yearly on top of that.
The bank can demand an even higher amortization though, it’s not forbidden; it just can’t take less than what the law says.
Not fitting the pattern
Whenever there’s a deviation from the “employed full-time, no problems, 15% down payment ready, full customer with the bank” scenario, there’s a potential to get a “no” as in “no mortgage”. Immigrants are by definition more prone to that, but here’s a story from RikaTillsammans' Jan Bolmeson about going through seven “no”es, educating the bank workers about personal finances, and finally reaching a “yes” after fighting to speak with the supervisor — so it can happen to anybody.
Quick recap of Jan's story for those interested
His special case is that he’s employed by his own aktiebolag, doesn’t have money lying around but rather invests them with another bank, has a spouse on parental leave at the time of writing, and plans to earn more money from renting out part of the house (tenants already there). The responses from the bank are both tragic and hilarious — e.g. “income from renting out doesn’t count because it’s only guaranteed for 3 months” (and a salary is guaranteed for life? Jan sneers), “a newspaper article says that this company where you’re a partner is not doing extremely good” (that company being technically a client of the company he’s (self)employed by and also going through an arguably normal stage of development). The bank also makes a calculation mistake by half a million somewhere in the midst of it.
If you're self-employed in your own AB, it's very important that you take out an actual salary and not just capital dividents; and the bank will also probably want to see your balansrapport and resultatrapport. I got a mortgage while both me and my partner were self-employed in our AB; in comparison with getting one as an employee, I had to send more documents and to talk to the bank clerks way longer, explaining everything about our business, but in the end it worked out fine. Generally, the more years of uninterrupted income you have in there, the better: when I was calling about a lönelåfte with 6 months of AB history, nobody wanted to have us as clients.
When does the money change hands?
To apply for a lånelöfte it’s not necessary to show that you actually have every single krona for the down payment. But there are two points in time down the road when the money must be available:
(1) when the seller and the buyer agree on the terms and sign the papers, the buyer transfers 10% of the cost of the apartment to the broker as a deposit. At this point the seller still owns the apartment and the deal might still be called off, but it’s highly unlikely. The broker transfers the money to the seller a little later.
(2) on the day when the buyer gets the keys and can move in to the apartment, the buyer’s bank must already have the rest of the down payment (at least 5%, although see above under 'How much money will the bank give'). While the seller and the buyer are signing even more papers and make small talk, the broker calls the buyer’s bank so that they transfer the rest of the apartment cost to the seller.
From the next month on, the mortgage payments begin according to the negotiated rate.
To bind or not to bind the rate
The rate on the mortgage in Sweden comes in two flavors: rörlig (moving) and bunden (bound).
Rörlig rate is lower and more flexible: if you want to pay off the loan earlier (e.g. you got a bonus at work and would like to pay off a part of the loan to get lower monthly payments) or to move the loan to another bank (probably because they offered a lower rate), it is not a problem. The potential downside is that technically you can’t count on your mortgage payment to be 100% predictable for more than 3 months in a row. Every 3 months the banks review the market conditions and can increase or decrease the rate.
Bunden rate is higher and applies to a period of up to 10 years. If you want to pay off the loan earlier (including the situation where you sell one apartment to buy another), the bank will demand a fee for that.
It’s possible to bind the rate only for a part of the loan (e.g. half of it) or to bind different parts for different periods of time. This is why the bank might suggest you split the loan in two parts — not because it changes anything, but because it makes it slightly easier for them to handle it if they manage to convince you to switch to bunden ränta in the future. But that might mean lock-in with the particular bank, as moving only a part of a mortgage to another bank might not be possible.
Since 2015, banks and other organizations have to publish their average loan rates (snittränta)— as in, the real rates their customers have, not the rates they advertise on their website (listränta) or whatever. They are also supposed to explain which factors contribute to lower rates. It’s useful to know this information before going into the negotiation about your rate.
When I was deciding whether to bind my rate, I found a beautiful graph showing the historical development of rörlig vs bunden rates. Unfortunately, I can’t find it again for the life of me, but it gave a very clear idea (which is echoed across the internet and casual Swedish conversations) that historically speaking, rörlig rate has always been cheaper in the long run even though it goes up and down more than bunden does. I believe that this fact explains why the bank is always happy to remind its customers they can bind their rate at any time, and why the clerks spend quite some time describing how horrifying it would be to not know what your mortgage rate is in five years from now — it’s just how the bank earns money.
This conversation does not come up until there’s a specific tangible apartment at hand though. And some banks, like the govenrment-owned SBAB, don't even make you have a conversation at all, their rates are open and same for everyone, not just those who can negotiate.
The bank also has to be involved before the deposit of 10% is transferred and the first documents are signed — they take a look at the apartment’s description and then give a green light.
Timeline
This is the order of interactions with the bank:
- Shop around for lånelöfte, pick the best one. Takes a few days. Lånelöfte is valid for three months (sometimes six).
- After finding an apartment and either winning the bidding process or reaching an agreement otherwise, contact the bank for approval of the deal. Should be as fast as a couple of hours.
- After signing the papers with the broker, iron out the conditions with the bank and open the necessary accounts. This might mean scheduling a meeting in person, but there are online-only banks where you skip that.
- A few days before getting the keys to the apartment, transfer the necessary sum to the dedicated bank account.
- In the month following the move into the apartment, start paying off the mortgage.
What if I don't need a loan
If you already have the money covering the price of the apartment, that's great, but buying an apartment like this comes with its own complications according to, for example, this forum thread. Brokers insist that a bank must participate from the buyer’s side — the buyer can’t just transfer the money from their account as a private person. Banks say anything from “it’s impossible” to “this will cost 7000 SEK” frequently mentioning the anti-money-laundering regulation. The answers “it’s impossible” and “yes, we do provide this service” might come from the same bank, depending on the clerk. Some banks will only agree to provide this service if both the buyer and their spouse will move all their finances/insurances/pensions/etc to them. And on top of all this there are delays which might botch the deal. The most often mentioned solution is a postväxel (money order). Try contacting different banks (starting with the one you're a client of) and asking them if they can arrange this. Be prepared for the broker's potential discomfort due to engaging in an unfamiliar procedure.
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