Financing a Home through Bank Loans

The bank contact is often the first step into the adult world of finance: an account and then a bank card. After that, it can involve savings, retirement investments, and not least, home loans. It can be difficult to understand how banks' assessments and rules regarding all of this work, especially if you are young and inexperienced. But do not despair. Here we explain what everyone should know about one of the most important areas, namely home loans.

How does the bank determine how much you can borrow?

For many, the question of mortgage loans becomes the first truly significant banking event in life. But the path there is not straightforward. The bank examines not only the price of the property but your entire financial situation. It is a comprehensive assessment, where individual details interact and influence the outcome. Therefore, it is not just the desired loan amount that matters – it is a range of factors that the bank weighs together.

Nowadays, there are online mortgage calculators that you can use to quickly get an estimate of how much you can borrow based on your own circumstances. This can give you an indication of the current bank's view on your ability to pay interest and amortize the loan you wish to take. Read more at ICA Banken to understand how this type of tool works.

What is required to be approved for a mortgage?

Your gross income, the security of your employment, and whether there is a co-borrower are important factors for you to be approved for a mortgage.

However, the bank also looks at your expenses: Do you have children? Previous loans? Maintenance obligations? and similar – all to assess how much you will have left each month after paying interest and amortization. Often, the calculations are also done as a stress test, which means the bank assumes a higher, hypothetical interest rate than the one that will actually be applicable.

Additionally, there is the mortgage ceiling – you cannot borrow more than 85% of the property's value – and the amortization requirements that dictate how quickly the loan must be repaid. The bank has a regulatory framework to follow, but also makes its own interpretations. This means that two different banks can give different responses, despite identical circumstances.

What affects the interest rate on the mortgage?

It is known that the interest rate determines how much a loan costs in practice, but few know exactly how it is set. What lies behind it is not only the policy rate set by the central bank – competition between banks, your creditworthiness, and the loan-to-value ratio of the property also play a role. Banks make an individual risk assessment for each borrower, and that is what determines how high your interest rate will be.

Among the factors the bank considers in its assessment are how stable your income is, how much you want to borrow in relation to the property's value, and whether you have other debts. The greater the risk the bank perceives, the higher your interest rate will be. This means that if you have a weak negotiating position, your mortgage interest rate may still be unexpectedly high, even if the policy rate is low.

What do amortization requirements and loan-to-value ratio mean?

In addition to determining the actual interest rate for your loan, the bank also sets rules regarding how quickly you should repay. The requirements are based, among other things, on the loan-to-value ratio, meaning how much of the property's value you are borrowing against.

If you borrow more than 70% of the property's value, you must amortize at least 2% per year. For a loan-to-value ratio between 50% and 70%, the requirement is 1%. Below 50%, there is no mandatory requirement, but the bank may still suggest that you should amortize. In addition to this, there is the so-called debt-to-income requirement: if your total loan exceeds 4.5 times your annual income, an additional 1% in amortization is required.

The combination of the interest rate and amortization, as well as any additional fees, has a direct impact on your monthly loan cost – for years to come. Amortization requirements have been introduced to reduce risks in the economy – but for the individual borrower, they can be burdensome, especially when interest rates are high.

Regulation and supervision of the banking sector

Banks are private companies, but they have such a significant impact on society that the state must act as a guardian. Supervision is carried out through regulations that govern how much banks can lend in relation to their own assets, how they should manage risk, and what they should do in a crisis situation.

Those who write the regulations always try to stay one step ahead, while banks look for ways to maximize their returns. The balance is difficult. Too much regulation and lending is restricted. Too little leads to speculation. The Swedish system is built on trust – both in terms of compliance with the rules and that there will be tangible consequences for those who violate them.

The Swedish Financial Supervisory Authority (FI) acts as the supervisory authority, with the goal of ensuring stability in the financial system and protecting consumers' interests. Their supervision is based on neutral monitoring with the power to intervene, but they also have a significant responsibility to understand how the market actually works.