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ECONOMY

What will Sweden’s interest rate hikes mean for foreigners in Sweden?

Sweden's Riksbank now expects its base interest rate to be close to two percent in three years' time. What will this mean for foreigners living in Sweden?

What will Sweden's interest rate hikes mean for foreigners in Sweden?
A person leafs through Swedish bank notes. Photo: Pontus Lundahl/TT

How high could interest rates go? 

The Riksbank on Thursday increased its key interest rate above zero for the first time since the autumn of 2014.

But it isn’t going to stop there, it expects to hike the rate in small increments over the next three years, to 1.18 in the middle of next year, to 1.57 in the middle of 2024, and to 1.81 in the middle of 2024. 

At a press conference on Thursday, the bank’s governor Stefan Ingves said that people should prepare for higher rates, but stressed that there would be “no extreme rate levels”. 

“We’re not slamming on the brakes, more taking our foot off the pedal,” he said. 

It’s worth remembering, though, that in the run-up to the Swedish banking crisis in the early 1990s, the key interest rate moved from 1 percent to 2 percent to as high as 10 percent, before the Riksbank finally upped it to 500 percent in a desperate attempt to defend the krona. 

As recently as February the Riksbank was not expecting to raise rates from zero until 2024, so if inflation proves more stubborn than expected, the key rate could possibly go higher. 

But Robert Boije, chief economist at Swedish state-owned mortgage lender SBAB, said that as inflation today is most likely the result of higher energy prices, and supply-side constraints, rather than because there’s too much money in the system, the risk of seeing higher rates than the Riksbank has outlined is relatively small.  

“There’s a higher probability of a lower repo interest rate [than expected] in 2024 than of a higher interest rate,” he said. 

How will higher interest rates affect mortgage rates? 

According to Claudia Wörmann, SBAB’s housing economist, interest rates on floating mortgages could nearly double over the next year from around 1.8 percent today to about 3 percent in January 2026.

She expects two-year fixed mortgages, which are now at around 2 percent to rise to 3.4 percent in January 2025, while five-year fixed-rate mortgages will rise from 2.5 percent today to 3 percent in 2023 and 4.1 percent in 2026. 

Many mortgage lenders had already anticipated Thursday’s rent rise, with Handelsbanken/Stadshypotek, Skandiabank, and SBAB all upping their mortgage rates by as much as 0.25 percentage points last week. 

Bigger monthly payments for those with loans

According to Wörmann, someone with a million kronor mortgage who currently has a two percent interest rate, would see their monthly payment double from about 1,160 to 2,330 if their mortgage rate rises to four percent. 

As most borrowers pay more than they need to simply to meet their interest payments, however, many have some flexibility, meaning they can slow down their repayments to make it easier to bear the increased cost, she said.  

“One aspect is the interest rate, but you need to bear in mind that a normal household amortises much more than they pay in interest rates,” she said. 

Lower buying power for those without a mortgage

For foreigners in Sweden looking to borrow to buy a house, higher mortgage rates will reduce the amount of money they can borrow to buy a house or apartment.  

Houses and flats in Sweden might get more affordable

Two years of rising house prices showed signs of coming to halt last month. 

The Swedish financial supervisory authority warned earlier this month that in its worst-case scenario, where rising interest rates are compounded by higher power costs for consumers, house prices could fall by as much as 30 percent. 

In its less dramatic scenario, the prices of apartments owned as part of a cooperative – so-called bostadsrätter – would fall only slightly, while the price of detached houses would fall 10 percent. 

“Our prognosis is that housing prices at the end of 2024 will be about ten percent lower than what they were on January 1st this year,” said Boije. 

The decline will start with a 1.3 percent drop this year, followed by a bigger 6.1 percent drop next year, and then a 3.8 percent drop in 2024. 

For most buyers the affordability of housing will not change very much, Boije points out, as higher interest rates will reduce the amount they can borrow. 

“If there’s a one-to-one correlation between the interest rate and housing prices, then the use cost of housing in economic terms will not change very much,” he said. 

Foreigners who are able to buy in Sweden without taking out a loan, will see a benefit, however.

It will also become easier for those taking out a mortgage to gather together the 15 percent of the value of the property they are required, under Swedish law, to pay in cash. 

READ ALSO: Will Swedish housing prices plummet as interest rates rise?

Wörmann said there was little doubt that the increase would start to pull down house prices, particularly when you looked at rising costs and post-pandemic effects. 

“It’s more expensive to buy food, you have to take into account that people are spending much more money on electricity and on fuel,” she said.

“We are leaving a pandemic where we were stuck in our homes, which might have meant that people didn’t mind paying a lot of money for their house as they spent so much time there. Now we are released from our home, and that might change how we look at our homes and our willingness to buy something expensive.” 

For foreigners who have yet to buy a house or flat in Sweden, a 30 percent fall in prices would of course be quite welcome, increasing the affordability of property in the country. 

Foreigners paid in local currency may benefit from a stronger krona

The hike in interest rates saw the value of the Swedish krona rise against both the dollar and the euro on Thursday.

If the Riksbank has now left behind the loose monetary policy which saw it keep the key interest rates negative between February 2015 and December 2019, the krona could strengthen against other currencies. 

“If markets now expect the Riksbank to be more hawkish relative to the Fed in the US and the ECB, this should increase the value of krona,” Boije said. 

This will mean foreigners paid in kronor will earn more once their salary is converted into another currency. Conversely, those paid in euros or dollars, but living in Sweden, could see an effective salary cut. 

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ECONOMY

EXPLAINED: What can foreigners in Sweden do about the weak krona?

The Swedish Krona last week hit a record low against the dollar, hammering the international buying power of anyone earning their salaries or holding assets in the currency. We asked Johan Löf at Handelsbanken what they can do.

EXPLAINED: What can foreigners in Sweden do about the weak krona?

How low is the krona right now? 

On Tuesday, September 27th, the krona to dollar exchange rate hit an all-time-low of 11.37, easily beating the previous record low for the currency of 11.04, which it reached at the nadir of the dot com bust back in 2001. At the time of the financial crisis in 2008, a dollar would have got you less than 6 kronor, meaning the currency has almost halved in value in less than 15 years. 

A euro now gets you 10.9 kronor, which is not quite a record, with it briefly topping 11.4 in 2009, but more than it has been for most of the past decade. 

The only major currency which is more or less stable against the krona is the pound, which will now buy about 12.39 kronor, down from 13 in February, but above the levels of around 10.5 the pound hit shortly after the UK voted to leave the European Union. 

Why is the krona worth so little? 

Johan Löf, the head of forecasting at the Handelsbanken bank, told The Local, that the krona always tended to take a hit at times of financial uncertainty. 

“The krona is a relatively small currency much like the Swedish economy is a relatively small economy,” he said. “You could compare it to a small boat sailing the big ocean, so when you don’t go on the course that you thought you were going, it can be a bit of a shaky ride,” he said.

“Right now with financial market conditions being volatile, with a lot of uncertainty and risks, the Swedish krona takes a hit. Investors and various agents of the economy don’t want to hold so much of this smaller currency. Instead, they they go to safe havens like the US dollar.

“So even though there are fundamentals that would suggest that the Swedish kroner will strengthen again over time, for the time being and for some foreseeable future, we think that the krona will remain quite weak.”

How are foreigners living in Sweden affected? 

It very much depends on their individual financial situation: which currency they earn their salary in, which currency they hold assets in, and which currencies they have the highest outgoings in. 

People who live and earn in Sweden, but travel regularly to countries with stronger currencies, or perhaps send remittances back to family at home, are likely be negatively affected, Löf said. 

“It makes you lose purchasing power in these other countries: you get fewer goods and less services for the money that you have in the Swedish currency.”

It’s a similar situation for people or small businesses based in Sweden, who need to, or perhaps only want to, buy goods outside of Sweden. 

On the other hand, for people who have substantial savings abroad in dollars or euros, this might be an opportunity to convert them into kronor for use in Sweden.  

“If you have savings abroad, and you feel the need to use some of those savings, when you then sell your foreign currency to buy Swedish kronor, then you will get more Swedish kronor,” Löf explained. 

What can foreigners living in Sweden do to lessen the impact of a weak krona? 

Change the currency in which you get paid 

The best way to protect against currency exchange shocks is to make sure that you’re paid in the same currency that you spend in, so if you live in Sweden but have a lot of your outgoings abroad, it’s an advantage to be paid in dollars or euros. 

If you’re considering getting a new job, perhaps favour international employers that can pay you in one of the major currencies, or if you work for a big international company, perhaps you can ask to be paid in a different currency. 

Get freelance or part-time work outside of Sweden

If you work as a freelancer, or have some spare time for additional work, consider getting part-time freelance gigs with companies abroad that pay in euros or dollars. The lower the krona sinks, the higher your real wage when you spend in Sweden. 

Time major spending for the best point in the market 

If you have savings in kronor and are considering, for instance, buying a holiday house abroad, it is probably worth waiting until the kronor has strengthened and the Swedish economy is back growing strongly. 

Similarly, if you have savings outside of Sweden in euros or in dollars, and have been planning on buying a property in Sweden, now might be a good time to consider doing so (although it may be worth waiting a few months until interest rate rises have been fully reflected in reduced Swedish property prices).

Get a multiple currency account 

It can be helpful to have an account in multiple currencies, such as those provided by banks such as Wise and Revolut. Keeping any cash in a combination of dollars, euros and kronor can reduce your exposure to any single currency. 

The advantage for foreigners living in Sweden is that you can set up US dollar, Euro and Pound accounts, each with their own local bank number, which you can use to receive and make payments domestically in each country. 

With the krona so low right now, it may not be a good idea to convert all your assets from krona to euros or dollars right now, as the currency is probably more likely to strengthen than weaken over the coming year.

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