An increasing proportion of new home mortgages are taken out by borrowers with a high total debt in relation to gross annual income. The Financial Supervisory Authority (Finanstilsynet) believes that is a worrying development.
In this year’s mortgage survey, Finanstilsynet has reviewed almost 8,000 new loans and 4,000 new overdraft facilities (credit where the customer can withdraw already repaid main claims), which have been granted to homeowners after August 1.
The survey shows that 45% of the granted loan amount was taken out by borrowers with a debt ratio (how many times income can be borrowed) of over 400%, while 27% was given to borrowers with a debt ratio above 450%.
Many borrowers who take out new loans on mortgages have high consumer debt.
“This year’s mortgage survey shows that a large and growing proportion of new loans are taken out by borrowers with high total debt.
“Many borrowers have both high total debt in relation to income, and mortgages that make up a high proportion of the value of the home,” Per Mathis Kongsrud, Director of Digitization and Analysis at Finanstilsynet, said.
“This is worrying as these borrowers can be particularly vulnerable in the event of loss of income, increased interest rates, or a fall in house prices,” he continued.
Increased debt ratio
The proportion of new loans granted to borrowers with both a high debt and loan-to-value ratio has increased over the past year.
The average debt ratio of borrowers who took out new mortgages increased to 338% in this year’s survey. This is four percentage points higher than in 2019 and 20 percentage points higher than in 2016 (before the debt ratio was regulated in the legislation).
The mortgage survey also shows that borrowers who took out a new repayment loan with a home in Oslo as their main collateral have a higher average debt ratio than borrowers elsewhere in the country.
In Oslo, the debt ratio is 389%, while elsewhere in the country, the debt ratio is 33%.
However, the loan-to-value ratio (how large a share of the home is mortgaged) is lower in Oslo than in the rest of the country.
This difference must be seen in light of the fact that house prices are particularly high in Oslo, Finanstilsynet writes in the report.
Many first-time buyers are also close to the requirements for a maximum debt ratio or loan-to-value ratio, Finanstilsynet reports.
About half of the first-time buyers in the survey had a loan-to-value ratio of between 80 and 85% after the loan was taken out, while 19% had a loan-to-value ratio of more than 85%.
The survey also shows that the proportion of new loans to borrowers with insufficient serviceability has decreased somewhat from last year’s survey.
In this year’s survey, 3% of borrowers have insufficient serviceability – which is defined as the fact that they would not tolerate five percentage points higher interest rates.
The proportion of those who cannot manage this is largest among borrowers under the age of 25 with 8% (with a continued decline), while among mortgage customers over the age of 65, the proportion is 5%.
Fear interest rate hike
Chief Economist Christian Frengstad Bjerknes of the Norwegian Co-operative Housing Federation (NBBL) believes that the high debt ratio may lead to Norges Bank raising interest rates faster than expected.
“COVID-19 has not led to a standard demand-driven downturn in the economy.
“More and more young people are “maximizing” the mortgage. With high housing prices, it is not surprising that young people struggle to stay within the limits of the mortgage regulations.
“Too many simply borrow too much,” he commented on the figures.
Carl O. Geving, CEO of the Norwegian Real Estate Association, believes that there is a choice between plague and cholera.
“The plague is financial instability as a result of some households borrowing too much money.
“Cholera is falling in housing values and the Norwegian economy as a result of the authorities tightening their lending regulations too hard.
“In this situation, the plague is preferable,” he said.
Finanstilsynet’s mortgage survey is conducted annually and includes a selection of new loans that have been mortgaged.
Thirty of the largest banks provide information in the survey.
© NTB Scanpix / #Norway Today