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29 October, 2018

A complete guide to buying an apartment in Stockholm (Part 2)

Buying an apartment is one of the most serious steps in life. It requires a lot of planning, savings and to be as prepared as possible. On this part two of the series, I will talk about the mortgage and downpayment. To read part 1 click here

Know your Purchase Ability.

Before rushing into apartment visits, you should already have the answer to the following two questions:

Do you have sufficient money (savings) in your bank account? How much can I lend (mortgage) from the bank? To know how much can you get from the bank, follow these steps:

  1. Download a copy of the ‘Downpayment and monthly cost model’ and enter your own figures.
  2. Calculate your Downpayment threshold – determine the price of the apartment you can afford in reality.
  3. Calculate your Total Monthly cost – estimate how much it costs monthly at a realistic property price.

Reality Check #1: Calculate your downpayment threshold 

Your actual wealth is comprised of asset and cash

1) Mortgage (‘Bolån’ in Swedish) – Is the loan that you can borrow from a bank which is going to fund 85% of your property purchase

  • You can borrow about 4.5x your annual income (since Jan 2018). Using an average disposable income of 45,000 KR/ month in Stockholm, one can borrow around 2.4m (=45000*12*4.5).
  • Your loan interest is 30% tax deductible! This means that you get 30% off, paying your interest at a very low and discounted price for owning the entire apartment rather than paying for someone else’s and still not owning any parts of it.

2) Savings in your bank for the downpayment – The downpayment (‘Kontantinsats’ in Swedish) is the initial money you are required to pay when the purchase is made. The money is readily available in your Swedish bank to be transferred to the seller.

  • A minimum 15% of the apartment value is required by Swedish law.
  • Note that if you have a lower income level, you may not be able to borrow enough to cover the full amount of 2.4 m. You will then be required to pay >15% depending on your apartment ‘s price. In that case, choose a smaller and cheaper apartment instead.

So, how much do you need for the downpayment?

Always have money readily available, at least 15% of the downpayment. This amount can change and you may end up paying 25%

  • Being a foreigner, you may not be able to borrow as much with less than 3 years of bank records in Sweden.
  • Your loan might still not be able to cover the full apartment price if you have a lower income or if you desire a bigger apartment

Several hundred thousand KR might sound a lot for a young professional. This is one of the reasons why many local parents buy an apartment for their children to give them when they finish university. However, if you have already been working for several years, then you might possibly be able to have the downpayment by yourself with a smart savings plan.

Your Downpayment Calculator
Max Loan – 5x income (‘000 kr)
2,430
Mortgage (‘000 kr) Downpayment (%) Downpayment (‘000 kr) Apt price (‘000 kr)
1,275 15% 225 1,500
1,700 15% 300 2,000
2,125 15% 375 2,500
2,430 (max) 19% 570 3,000
2,430 (max) 31% 1,070 3,500
2,430 (max) 39% 1,570 4,000
Bold*: >15% downpayment required

Request to download your downpayment calculator here.

Using the above scenario of 45,000 KR as a monthly income and a 15% downpayment, you can consider buying an apartment worth of 2.5m with a downpayment of 375,000 KR and a loan of 2.1m (<2.4m of what your bank would allow).

For any apartment of 2.86m or above, you will be paying >15% as your max loan offers only to 2.4m. e.g. 31% of downpayment for a 3.5m apartment.

Try entering your own income level in the calculator now, check the maximum loan you can borrow and the optimal amount of down payment you can handle.

Reality Check #2: Calculate your monthly costs

Your monthly costs for owning an apartment is split into 4 parts:

  1. Mortgage Loan Interest (‘Bolåneräntor’ in Swedish) – Varies according to which bank you choose.
  2. Amortization – This is not really a cost. Simply put, this is the money you slowly pay off the total amount you borrowed (principal) through a monthly period. The amount you pay is around 1% of your loan. Note that after your loan-to-apartment price ratio reaches below 50%, you will no longer need to be paying amortization.
  3. Housing Association fee (‘Avgift’in Swedish) – aka management fee for the association who takes care of the building.
  4. Utility costs: This is a small payment. Heating is free in Sweden according to the law. Some buildings come with free water and cheaper wifi package. Internet, insurance and electricity will usually amount to about 500kr/month per person.

The table below shows the total monthly cost when you move in (i.e. loan-to-apartment price ratio >50%)

Currently, most small apartments in Central Stockholm are priced around 2.5-3.5m. Assume that you buy an apartment worth of 2.5m, with a downpayment of 15%, interest of 1% and amortization rate of 1%. Your monthly costs are 4,722 tr in total.

However, you will only receive the 30% tax refund on your loan interests (10,200 tr=34,000*30%) at the END of each fiscal year, so make sure you have enough cash flow to pay 6,731 KR each month.

Assumptions
Annual costs (‘000 kr) Downpayment rate 15%
Apartment price 2,500 loan Interest rate 1.6%
Downpayment 375 Amortization rate 1%
Mortgage/Loan 2,125
Interest 34 loan to apartment price/ market price
Amortization 21 85%
———————-
Interest/month 2.9 (million kr)
Amortization/month 1.8 Max loan (est. from SBAB) 2.63
Housing Association fee/month 1.6 Max loan (income x4.5) 2.43
Monthly costs 6.2 Max loan (est. from Skandia) 2.53
Internet 0.1
Insurance 0.2
Electricity 0.2
Other monthly costs 0.5
Monthly total 6,731
Less tax (30% deductible on interest)
Monthly total after tax deduction 4,722

The table below shows the total monthly cost when you pay off a good level of loans (i.e. loan-to-apt price ratio <50%)

Assumptions
Annual costs (‘000 kr) Downpayment rate 15%
Apartment price 2,500 loan Interest rate 1.6%
Downpayment 375 Amortization rate 0%
Mortgage/Loan 1,225
Interest 19.8 loan to apartment price/ market price
Amortization 0 49%
———————-
Interest/month 1.7
Amortization/month 0
Housing Association fee/month 1.6
Monthly costs 3.3
Internet 0.1
Insurance 0.2
Electricity 0.2
Other monthly costs 0.5
Monthly total 3,745
Less tax (30% deductible on interest)
Monthly total after tax deduction 2,587

As  I mentioned in Part 1, the actual cost of the apartment is only about 3,000 KR/ month. This happens when your loan to apartment price is less than 50%, meaning that you pay off a good level of loans. Then your amortization rate will equate to 0%,  i.e. your monthly amortization amounts to 0.

This way, you are exempted from paying 19,800 KR per year. Your total monthly cost after tax deduction will now be 2,587 KRper month. Now, compare that to your rental costs (12,000 KR/ month)!

If you are still renting, you are basically helping the flat owner repay his/her million KR loan.

After completing this exercise, it’s time to check the market to see if there are apartments in your price range.

 

The posts on this Blog are distributed for informational and entertainment purposes ONLY.  Forecasts, estimates and certain information contained here should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Past performance is not indicative of future results.  The Author in no way guarantees any specific outcome or profit.  Investments can lose money over short or even long periods of time.  You should consult your financial advisor before making an investment decision.

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Teenie Fung
Teenie is a Stockholm-based investment advisor and tech enthusiast. Inspired by the gigantic potential of Stockholm aka 'Unicorn Factory', Teenie left her job from a top-tier bank in Hong Kong and moved to Sweden in 2017.
Prior to that, she worked in different countries across Europe and Asia, challenging herself on cross-border investments and business development. Since the beginning of her new life in Stockholm, she has been actively engaged with high-tech transactions from startups to multi-billion dollar companies in the Nordics.
She's also the creator of an online activewear brand (yogafriday.com) and the founder of a fashion community that is still active today in England. At present, Teenie continues to seek for emerging technologies in pursuit of improving everyday living and a better future.

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