Home equity extraction activities in Sweden
News, Staff memo Estimates suggest that one-third of mortgage borrowers in Sweden have extracted home equity at least once during the period 2010 – 2017. Home equity extraction raises the debt-to-income ratio of households by 50-70 percentage points, which may increase the vulnerability of households should economic conditions deteriorate, write the authors of a new Staff Memo.
Home equity is the difference between the current home value and the outstanding mortgage of the household in their home. Households can use home equity as collateral to obtain additional mortgage credit. This additional borrowing is called home equity extraction. This staff memo investigates how many and which households extract home equity, how much they extract, and the consequences of home equity extraction for household indebtedness.
On average, households that extract home equity increase their mortgage debt by SEK 300,000 per extraction, equivalent to a 20 per cent increase. Households with adults aged between 35 and 65 years with relatively higher incomes and higher indebtedness levels extract more home equity. Home equity extractors often reside in areas with high house price growth.
About twenty per cent of home equity extractors may have used extracted home equity to repay more expensive consumption loans. However, this is not the main purpose of home equity extraction for most households. The majority of the extracted home equity has instead been used for other purposes, most likely home renovation or consumption expenditure.
The authors find that home equity extraction leads to higher household indebtedness in Sweden, which may increase the vulnerability of Swedish households. It is therefore important to monitor how home equity extraction activities develop in the future.
The staff memo was written by Jieying Li, Peter van Santen and Xin Zhang.
ABOUT STAFF MEMOS
A staff memo provides members of the Riksbank’s staff with the opportunity to publish advanced analyses of relevant issues. It is a publication for civil servants that is free of policy conclusions and individual standpoints on current policy issues.