Amortization Requirements and Household Indebtedness: An Application to Swedish- Style Mortgages

Since the mid-1990s, many OECD countries have experienced a substantial in- crease in household indebtedness. Sweden, in particular, has seen indebtedness rise from 90% of disposable income in 1995 to 172% in 2014. The Swedish Financial Supervisory Authority (FSA) has identi ed mortgage amortization requirements as a potential instrument for reducing indebtedness; and has drafted guidelines that will intensify the rate and duration of amortization. In this paper, I charac- terize Swedish-style mortgage contracts, which di er substantially from U.S.-style contracts. I then evaluate the policy changes in an incomplete markets model with three types of debt and a novel mortgage contract speci cation that is cali- brated to match Swedish micro and macro data. I nd that intensifying the rate and duration of amortization is largely ine ective at reducing indebtedness in a realistically-calibrated model. In the absence of implausibly large re nancing costs or tight restrictions on the maximum debt-service-to-income ratio, the policy im- pact is small in aggregate, over the lifecycle, and across employment statuses. These results may be relevant for other OECD countries, such as Norway and Canada, that have also not seen a reduction in house prices or indebtedness since the 2007 nancial crisis.