Mortgage rates can change without the Riksbank adjusting the policy rate

Economic Commentaries, News Mortgage rates for Swedish households co-vary with the Riksbank’s repo rate, but are also dependant on several other factors. One of these is how Swedish banks are funded and how the cost of their funding develops. In a new Economic Commentary, the authors provide a general description of how the major Swedish banks are funded, how changes in market conditions affect their funding costs and how this ultimately can influence household mortgage rates.

How banks obtain funding has a considerable bearing on their lending rates and thereby affect the transmission mechanism, the financial stability analysis and the Riksbank’s monetary policy considerations. Household mortgages make up a large share of bank lending and it is important for households to understand what can affect mortgage rates when they take on debt and choose interest-rate fixation periods.

In previous crises, funding costs for banks have increased for various reasons and increased funding costs can in turn lead to higher mortgage rates. An initial increase in certain bond rates and banks’ short-term funding costs could also be seen at the beginning of the current coronavirus pandemic, but this increase has since been mitigated by central bank measures and funding costs are now back at very low levels.

In this Economic Commentary, the authors divide the difference between the repo rate and mortgage rate into various sub-components, mainly to show how the funding components have influenced household mortgage rates over time. The Commentary also shows how the banks manage their funding differently depending on whether households choose a fixed or variable interest rate. Finally, the authors illustrate the extent to which and how quickly different changes in interest rates affect banks’ funding costs for mortgages.

By Richard Eidestedt and David Forsman, who work at the Riksbank’s Financial Stability Department, and Emre Ünlü, who was working at the Financial Stability Department when some of the work was done, but has now left the Riksbank.

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Updated 25/09/2020