This report does not constitute a rating action
Swedish Covered Bonds
Withstand Higher Mortgage Rates
Casper Andersen
Phuong Nguyen
June 20, 2024
• Average monthly mortgage payments in Sweden have increased by more than 68% since 2022, as policy and mortgage rates increased
to multi-year highs. Housing and utility costs now comprise 64% of the recent growth in consumer price index (CPI).
• The average monthly payment per loan part for a sample of over a million mortgage loans backing Swedish covered bond programs we
rate has risen to Swedish krona (SEK) 2,527 in 2024 from SEK1,503 in 2022, partly due to the increasing popularity of floating-rate
mortgages. Most Swedish borrowers have two loan parts.
• In our 2024 sample, borrowers already paying high installments have been proportionally more affected by increasing interest rates.
Since 2022, the proportion of borrowers paying less than SEK2,000 has decreased to below 50% from 74% and the proportion paying
more than SEK5,000 has increased to 7.4% from 2.2% .
• Loans originated in 2023 had 20% higher installments than those originated in 2021 due to lower interest-only availability and a higher
proportion of floating-rate loans. This has likely affected mortgage market activity.
• In our sample, more than 80% of loans are either floating-rate or will be reset to a fixed rate by the end of 2024, having then experienced
higher interest rates. The proportion of floating-rate and short-term fixed floating-rate loans has increased, thereby increasing overall
borrower interest sensitivity.
• Swedish mortgage performance remains stable despite our analysis highlighting higher-than-expected monthly payments. We expect
Swedish covered bond ratings to remain stable, given high overcollateralization buffers and unused notches of uplift from the issuer
credit rating.
Key Takeaways
2
3
Consumer Prices Are Normalizing, But Housing Costs Remain High
• Over 2022-2023, Swedish consumers suffered
a substantial cost of living shock.
• Despite falling since early 2023, consumer
price inflation remains higher than the long-
term average, mainly due to persistent
housing and utilities cost pressures, which
comprise 64% of the recent growth in CPI.
• We increased our short-to-medium term
inflation forecast due to prolonged high wage
growth against a backdrop of sluggish
productivity and uncertain trade
developments.
• As housing continues to contribute the most
to CPI growth (particularly at the start of
2024), the recent lowering of the policy rate
may have a knock-on effect on housing costs,
although it has not explicitly been stated by
the Swedish central bank as a driver for the
decision.
Swedish consumer price inflation components
Sources: Statistics Sweden, S&P Global Ratings.
-2
0
2
4
6
8
10
12
Jan-2020 Jul-2020 Jan-2021 Jul-2021 Jan-2022 Jul-2022 Jan-2023 Jul-2023 Jan-2024
Housing and Utilities Transport Food Other Overall Unemployment
• Following eight consecutive rate hikes leaving
the Swedish base rate at 4% in late 2023,
Sweden’s central bank (Riksbank) lowered its
policy rate by 25 basis points in May 2024, to
reflect closer to target inflation and weak GDP
growth and labor markets.
• We expect policy and market rates to continue
falling. The market consensus for the Swedish
base rate suggests 3% by the end of 2024.
• Swap rates are down and are steady at
between 2% and 3%, establishing a new
normal for mortgage rates. In our view, this will
help support mortgage borrowers.
Swedish interest rate benchmarks (%)
First Policy Rate Cut Since The 2023 Peak; Market Rates Continue To Fall
Dotted lines indicate market-implied forward rates for swaps and market consensus forecast for the policy rate.
Sources: Bloomberg, S&P Global Ratings.
-1
0
1
2
3
4
5
Jan. 2017 Jan. 2018 Jan. 2019 Jan. 2020 Jan. 2021 Jan. 2022 Jan. 2023 Jan. 2024
Policy rate Two-year swaps Five-year swaps
4
5
Typical Monthly Mortgage Payment Up By 68% Between Early 2022 And 2024
• We compared monthly mortgage payments in a 2024
sample of over a million Swedish mortgage loans with a
previous sample from 2022.
• The average monthly mortgage payment per loan part in our
2024 sample had increased by 68% to more than SEK2,500,
from SEK1,500 in our 2022 sample. Most Swedish borrowers
have two loan parts.
• Monthly payments have risen proportionally more for
borrowers already making higher payments than for those
making lower payments.
• The proportion of borrowers paying less than SEK2,000 has
decreased to below 50% in 2024 from 74% in 2022. Those
paying more than SEK5,000 now account for 7.4%, up from
2.2%.
bps--Basis points. SEK--Swedish krona. Source: S&P Global Ratings.
Monthly payment distribution
Rate (%)
Average
payment (SEK)
Average
increase (SEK)
Average
increase (%)
January
2022
1.60 1,503 -- --
January
2024
3.95 2,527 1,024 68
0
5
10
15
20
25
0-500
500-1000
1000-1500
1500-2000
2000-2500
2500-3000
3000-3500
3500-4000
4000-4500
4500-5000
5000-5500
5500-6000
6000-6500
6500-7000
7000-7500
7500-8000
>8000
Fraction of loan sample (%)
Monthly mortgage payment (SEK)
Jan. 2022 Jan. 2024
Collateral breakdown, by interest rate type Reset date distribution for fixed rate loans
Short-term fixed
49%
Floating for life
51%
6
Interest Rate Sensitivity On The Rise Due To More Floating-Rate Mortgages
And Shorter Rate Fixings
• Sweden is traditionally a mortgage market with short-term interest rate fixings. During the low interest rate environment, longer interest rate fixings gained
popularity, but this trend has now reversed.
• Between 2022 and 2024, the proportion of floating-rate mortgage loans in the sample backing the covered bonds we rate has increased to 51% from 41%,
making borrowers more sensitive to rate rise, on average.
• Furthermore, fixed-rate mortgages have a shorter fixing period, and about 45% of those will have reset by the end of 2024, from 40% in the 2022 sample.
0
5
10
15
20
Already
reset
2024 Q2
2024 Q3
2024 Q4
2025 Q1
2025 Q2
2025 Q3
2025 Q4
2026 Q1
2026 Q2
2026 Q3
2026 Q4
and later
Fraction of fixed-rate
loan sample (%)
Fixed-rate reset date
Collateral breakdown, by repayment type Remaining term for amortizing loans
Amortizing
57%
Interest-only
43%
7
Pools Now Have Lower Rate Sensitivity, Due To Fewer Loans With Long
Maturities And Interest-Only Repayment Profiles
• The proportion of our 2024 sample that is interest-only loans has decreased to 43% from 45% in 2022. However, this is still a significant share. Higher
mortgage rates have not led borrowers to take more interest-only loans but seem to have encouraged amortization slightly.
• Absolute monthly payments are generally lower for interest-only loans. However, these loans are more sensitive than amortizing loans to interest rate rises.
• Amortizing loans with a remaining term of more than 30 years have decreased to 14% of our sample, from 15%. Higher interest rates do not seem to have
increased mortgage maturities. This is important as loans with a longer maturity are also more sensitive to rising interest rates as the interest component is
a comparably higher portion of monthly installments.
0
10
20
30
40
50
60
<5 5-10 10-15 15-20 20-25 25-30 30-35 35-40 40-45 >45
Fraction of amortizing
loan sample (%)
Remaining term (years)
1,515
2,998
1,494
2,027
1,483
533
0
1,000
2,000
3,000
4,000
Jan. 2022 Jan. 2024 Jan. 2022 Jan. 2024
Floating for life Short-term fixed
(SEK)
Monthly payment Payment shock Share of sample
• In the 2024 sample, 49% of loans are fixed
rate and the rest (51%) are floating rate,
where rate rises materialize quicker.
• In our 2022 sample, 40% of loans had a
short-term fixed-rate, resetting by 2023,
and a further 45% will end their fixed-rate
period in 2024, which mean almost all
borrowers in the sample have been
affected by higher interests at the end of
2024.
• Therefore, more than 80% of the loans in
our 2024 sample will have seen some
impact from rate rises by the end of 2024.
• While payments on fixed- and floating-rate
mortgages were similar in our 2022 sample,
rising interest rates have doubled floating-
rate mortgage payments, while payments
on fixed-rate loans have only increased by
about one-third.
Monthly payments by loan product type
Most Loans Are Floating Rate, Or Will Revert From Fixed Rate By Year-End
Pie charts show prevalence of each loan product type in the sample. bps--Basis points. SEK--Swedish krona. Source: S&P Global Ratings.
51%
49%
8
2,152
3,007
716
1,903
855
1,187
0
1,000
2,000
3,000
4,000
Jan. 2022 Jan. 2024 Jan. 2022 Jan. 2024
Amortizing Interest-only
(SEK)
Monthly payment Payment shock Share of sample
9
Payment Shock Is More Severe For Interest-Only Borrowers
• In our 2022 sample, interest-only loan monthly payments
were typically much lower due to not having to regularly pay
down principal, averaging just SEK716, versus SEK2,152 for
repayment loans.
• Interest rate rises since 2022 have typically more than
doubled the monthly payment on interest-only loans, with
the average payment rising by almost SEK1,200 to more
than SEK1,900 per month in our 2024 sample.
• Repayment loans posted only a 40% average payment
increase of SEK855 from the previous payment.
• In the 2022 sample, amortizing mortgage payments were
more about three time that of average payments on
interest-only loans. In 2024, the difference changed to 58%.
Pie charts show prevalence of each loan product type in the sample. bps--Basis points. Base scenario is as of Jan. 1, 2022.
SEK--Swedish krona. Source: S&P Global Ratings.
Monthly payments by repayment type
57%
43%
10
New Loans Have High Payments, While Older Vintage Loans Have The Highest
Payment Increases
• Across our samples, loan payments for interest-only loans
increased. Since fewer new interest-only loans are being
granted, older vintage loans are more likely to be affected by
higher interest rates and payment shock.
• For instance, interest-only loans constituted a high
proportion (60%-70%) of loans originated before 2015.
• Earlier vintage loans--despite generally having lower loan
balances and lower monthly payments--have a greater
relative sensitivity to interest rate rises, on an average.
• For example, the average payment for 2011 vintage loans
was SEK963 at the beginning of 2022, compared with
SEK2,128 for the 2021 vintage.
• However, for 2011 vintage loans, the average monthly
payment has increased by 88%, versus only 34% for the
2021 vintage.
• Regardless, due to higher interest rates, borrowers from the
2023 vintage had a more than 20% higher installment than
borrowers from the 2021 vintage.
Payment shock and interest-only share, by loan vintage
SEK--Swedish krona. Source: S&P Global Ratings.
0
10
20
30
40
50
60
70
80
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Average monthly
payment (SEK)
Loan vintage
Interest-only (right scale)- 2024 sample
Interest only - 2024 sample
Amortizing loan - 2024 sample
Jan. 2024
Jan. 2022
(%)
Ratio of available to required credit enhancement Covered bond program uplift from issuer credit rating
11
Swedish Covered Bond Ratings Should Withstand Weaker Loan Performance
• In 2024, Swedish banks' asset credit quality will likely remain under pressure due to high mortgage rates and potential labor market
pressure.
• However, Swedish covered bond programs have significantly more available credit enhancement than the level required to maintain
the current ratings, acting as a buffer against increasing credit losses.
• The ratings also benefit from "unused notches" of uplift, insulating program ratings if the issuer rating comes under pressure.
0
5
10
15
20
25
Sep-20
Dec-20
Mar-21
Jun-21
Sep-21
Dec-21
Mar-22
Jun-22
Sep-22
Dec-22
Mar-23
Jun-23
Sep-23
Dec-23
Mar-24
Jun-24
(x)
3
1
2
2
1
15 16 17 18 19 20 21 22 23
Swedbank Mortgage
Sparbank Skane
Lansforsakringar Hyp
Landshypotek
Danske Hyp
Issuer credit rating Resolution regime uplift
Jurisdictional uplift Sovereign rating
Number of unused notches
AAAAA+AAAA-A+AA-BBB+
• EMEA Structured Finance Chart Book: May 2024, May 13, 2024
• Global Covered Bond Insights Q2 2024: Strong Start To The Year For Issuance, March 27, 2024
• Economic Outlook Eurozone Q2 2024: Labor Costs Hinder Disinflation As Rate Cuts Loom
, March 26, 2024
• Swedish Real Estate: The End Of The Slump Could Soon Be In Sight, Feb. 29, 2024
• Nordic Banks In 2024: Ploughing On Through Tough Terrain, Feb. 7, 2024
• European Housing Markets: Forecast Brightens Amid Ongoing Correction, Jan. 25, 2024
• European Structured Finance Outlook 2024: Pushing On Through, Jan. 9, 2024
• Covered Bonds Outlook 2024: Stability Amid Turbulence, Dec. 11, 2023
• Swedish Covered Bond Market Insights 2023, Oct. 5, 2023
• Payment Shock In Swedish Covered Bond Pools, April 18, 2023
Related Research
12
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