Changes in credit assessments may amplify economic fluctuations

In the staff memo "Credit assessment for mortgages", the authors describe the components of a credit assessment for mortgages, how these have changed over time and how they affect borrowers. The staff memo focuses on the two main components of the credit assessment: the stressed mortgage rate, i.e. the interest rate that banks use to ensure that a borrower is able to pay higher interest rates, and the standardised cost of living, i.e. the amount that the borrower is assumed to spend on basic consumption. The authors find, among other things, that in the years 2021-2023, the increase in standardised costs of living and the stressed mortgage rate have led to a slight reduction in borrowing capacity. In previous years, households’ disposable incomes had grown faster than the standardised costs over time, giving households more room to borrow.

By comparison, the standardised costs of living that the banks use also appear to be lower than actual household expenditure. This indicates that banks assume that borrowers can make various adjustments to fulfil the credit agreement. If financial conditions deteriorate, some borrowers may need to make major adjustments, which they need to be aware of.

Financial crises have often been preceded by a period in which lenders have relaxed credit standards, increased the supply of credit and contributed to creating a self-reinforcing spiral between asset prices and debt. There is thus a clear link between lenders’ credit assessments and the stability of the financial system.

Authors: Karl Blom, Dominika Krygier and Niclas Olsén Ingefeldt, working at the Riksbank's Monetary Policy Department and Financial Stability Departments.