Fitch Ratings says residential mortgage loans in Scandinavia, the Netherlands and Switzerland have seen exceptionally strong performance despite high loan-to-value (LTV) ratios and significant household debt. This reflects generous social security systems and large household wealth, which are a common denominator of these ‘AAA’ rated jurisdictions with strong public finances.
The growth of housing debt in Scandinavia, the Netherlands and Switzerland can be explained by a combination of tax deductibility, low interest rates, and unique features of each respective mortgage market. These include long contractual tenors and interest-only periods. Limited repayment has made borrowers more sensitive to house price decreases. However, macro-prudential requirements in each country are helping to address the risk that high household debt could jeopardise financial stability.
Macro-prudential measures were originally focused on maximum LTV and stressed affordability at origination, but lower mortgage rates continued to stimulate mortgage growth. Banking authorities therefore imposed minimum mortgage loan amortisation as well as maximum loan-to-income (LTI) or debt-to-income ratios. Such restrictions have contributed to the recent adjustment in Norwegian and Swedish house prices and limited lending growth in Denmark. Swiss regulators have tightened capital requirements for banks and promoted self-regulation, which established minimum amortisation for mortgages above 66% LTV. Gradual changes to tax incentives and underwriting standards were introduced by the Dutch authorities, especially since 2013, which have made the mortgage market more resilient.
