Save Borrow
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Gilla Din Ekonomi is a nationwide network that was created by authorities, organisations and financial institutions with the purpose of working together to educate the general public on economic and fi nancial matters. The network's objective is to improve the opportunities for residents throughout the entire country – and of all ages – to handle the increasing pressure from society to make various economic and financial decisions in life. The fundamental concept underlying the network is that both public and private actors have a common interest in supporting consumers. The goal is to help everyone handle their personal finances with more confidence through educational initiatives.
This brochure guides you through everything you need to know about saving and borrowing.
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Saving money allows you greater freedom in your day-to-day routines. It also acts as security, both in case your dishwasher suddenly breaks or as an extra buffer for your finances when you are older and no longer working. Borrowing money may sometimes sound irresponsible, but it can be a necessity and a way to increase the opportunities available to you. Most people borrow to buy their home. By understanding the process behind saving and borrowing, it becomes easier to make good decisions, which ultimately improves your finances. There are some irritating mistakes that it is a good idea to avoid. In short, you need to make simple, but smart, choices to get the most out of your money. In this brochure, we take a closer look at what you need to know about saving and borrowing. The content of this brochure has been prepared in cooperation with the Swedish Consumers’ Banking and Finance Bureau, Finansinspektionen, Avanza Bank and Swedbank och Sparbankerna. All of the participants are members of the Gilla Din Ekonomi network. Claes Hemberg, Investment Economist at Avanza Bank, helped author Saving, and Arturo Arques, Personal Finances Specialist at Swedbank och Sparbankerna, helped author Borrowing.
Photo: Studio CA
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Money is practical. It offers freedom and security. By saving and borrowing, you can also more easily plan how you will use your money.
TABLE OF CONTENTS SAVING Extra money means more freedom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Stretch your money farther . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Find money to save . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Our major expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Save both in the short-term and the long-term . . . . . . . . . . . . . . . . . . . . . . . . 10 Low interest rates basically give no return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Right balance offers both growth and security. . . . . . . . . . . . . . . . . . . . . . . . . 16 Simple decisions are important. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 BORROWING A loan increases your possibilities and your vulnerability . . . . . . . 20 Borrowing – for what? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21. How does it work?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Different types of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Student loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Housing loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Car loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Consumption loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Other things to think about . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Independent help for consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Ten questions about saving and borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Check list . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Helpful links and telephone numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SAVING Saving means putting money aside for the future. Saving allows you to plan purchases in the future, creates an extra buffer for unforeseen expenses and makes it easier to take a long-term approach when planning and managing your finances.
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Extra money means more freedom If you save, you will hopefully be able to realise your plans or even your dreams. Having a cash reserve in your account can also offer security, and money can even increase in value. All you need to do is create an environment where your money can grow.   First, we review two types of saving, shortterm saving and long-term saving, both of which can help your money grow. Choosing saving options that also have low fees and low taxes will enable you to get more out of every krona you spend.
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Stretch your money farther It is fun, and tempting, to spend money as soon as it lands in the account. But if you are able to be patient and create a nurturing environment, your money will grow and you will have more of it in the future. There are at least three ways to manage your money. Think of it like this. You have a “wallet” that you use for shopping now, a “pantry” for the next few months and a “garden” for the long-term future. These three tools require different approaches in order to give you the greatest benefits possible. Depending on what you want to do with your money, you can easily choose the best form of savings for them. You might want to use them immediately, wait a while or wait even longer. You can always change how you distribute your money. It is important to start with a practice run, because your money will flourish if treated with care. The choices you must make are in the end rather simple, and they only take a few minutes.
Money for different investment horizons Wallet – for shopping now Pantry – for the next few months Garden – for the long-term future
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Find money to save Many people find that their accounts are more or less down to zero by the time their next salary arrives. Unfortunately, this makes many people anxious, and they feel trapped by their lack of money. Here are a few tricks for making your money stretch even farther.
1. Start by saving a small amount of money every month, money that you will barely notice is missing. For example, 50 kronor.
2. Put your savings in a separate account early every month, so you will not notice it as much on a day-to-day basis during the rest of the month.
3. Raise the amount by, for example, 50 kronor every other month. After one year you will now be saving 300 kronor every month and you will have saved 2,100 kronor. If this sounds too easy and your finances are more robust, you can instead start by saving 500 kronor a month, and after one year you will have saved 21,000.
4. Keep your money in a savings account with 1–3 per cent interest. Make sure that your account has deposit insurance. This means that the Government will protect your money if the bank were to go bankrupt. to take it to the next level, for example, 5. Ifyou youcanwant save half of your next pay increase. Ulti-
Jan: SEK 50 Feb: SEK 50 March: SEK 100 April: SEK 100 May: SEK 150 June: SEK 150 July: SEK 200 Aug: SEK 200 Sept: SEK 250 Oct: SEK 250 Nov: SEK 300 Dec: SEK 300 SEK 2,100
mately, this is money that you did not need before. You are now making good progress. Your first goal could be to have one month’s salary in a reserve account. It could take anywhere from one to
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several years to achieve this goal, but the feeling of being able to save can help you view your possibilities in a new light. Saving large sums of money requires that you consider the major expenses in your household budget. Maybe you can lower your costs for housing or your car. By comparing prices, insurance premiums and mortgage interest rates, you can easily find savings of SEK 500 a month. Leisure and entertainment expenses are often larger than you realise. If you make your decisions with more care, you will soon have money left over. Do not wait for a higher salary. People with higher salaries often do not save more.
Our major expenses 1. ACCOMODATION 2. FOOD AND DRINK 3. TRANSPORT 4. LEISURE Source: Statistics Sweden
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Save both in the short-term and the long-term Different forms of saving have different rates of growth. You can expect a higher growth rate the longer you are able to let your money grow. By allowing your money to grow over varying lengths of time, you can accelerate or slow its growth. Money in your “wallet” will be used in the next few weeks. This period of time is rather short from a savings perspective, and you should not expect any noticeable returns from interest. You should instead focus on the savings in your short-term account – “your pantry” – where you will withdraw money over the next few months and your long-term account – your “garden” – where your savings can grow over a number of years and generate a significantly larger harvest.
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Short-term saving It is a good idea to have a “pantry” with a cash reserve. Keep in mind that you will use this money over the next few months. The money should be easily accessible and you should be confident that it is there. The short period of time that you will be saving the money will not give you a lot of interest, but it is better than in the wallet. There is an account that is perfect for short-term saving – a s avings account. It might sound boring, but what is most important is the security of knowing that the money is there. The interest rate is neither great nor bad; you can currently expect 1–3 per cent annually. Call around to several different institutions and compare. Always choose a savings account that has deposit insurance. This means that the Government guarantees your money. By having an account that is covered by deposit insurance, you can always expect to receive the amount that was in the account up to a m aximum of the equivalent of SEK 950,000 per savings institution. You can sometimes get significantly better interest rates if you choose to lock up your money, for example for two years, but the idea is for the money in your short-term saving to be easily accessible. Fixed income funds are one possible alternative, but not only does their growth rate vary, but you also need to learn more about when each type of fixed income fund is most appropriate.
WHAT TO DO: Short-term saving (the next few months) Choose a savings account with an interest rate of 1–3 per cent. Compare several institutions, it pays! Select an account with deposit insurance. 11
Long-term saving If you are going to save your money for longer than three years, it is time to move it to better soil. When you do without your money for so long, you can also expect that it will grow more. Approach this decision in three steps. First choose the savings form, then the fees and, finally, tax. It is as simple as it sounds. And every step gives you the opportunity to make choices that offer you more value for your money. You do not need to choose every month; it is normally sufficient to review your choices once a year.
Choose a simple form of saving for your “garden” People who save over a period of several years statistically can make higher demands on growth. The money does need to grow at a steady rate since it will not be used in the near future. In this case, growth is more important. If you are saving over a long period of time, you can aim for a return of five per cent a year, but such a goal will not be achieved by simply depositing your money in a savings account at an institution. Instead, you can choose a form of saving where your money will grow faster as companies build new factories, sell products and employ more people. Saving in shares and funds over the last few decades has given growth of 5–7 per cent each year, sometimes more and sometimes less.
WHAT TO DO: Long-term saving (3+ years) Choose global funds – this is simple. Choose primarily inexpensive funds. Choose low taxes. Decide when to buy, and start gradually. Decide when to sell, and do so in stages. 12
If you save your money in funds, you own a small piece of many different companies. Shares are a more complex alternative and you must trust your own knowledge. There is a considerable difference between placing your money in a savings account and investing in shares. Placing money in shares can mean that your return is more uneven, since companies develop at different rates. But there are ways to reduce the variation in Earlier results are no the value of an account. For example, guarantee of future you can save in the broadest equity return. funds possible – global funds. Then you are not saving all of your money in one company’s shares but rather your savings are working throughout the world. Large countries and markets then play a larger role. Smaller countries, industries and goods have less of an effect on your return. There is no guarantee that global funds will generate positive growth over a three-year period. Global funds can also lose value during periods of crisis or uncertainty. Therefore, do not save all of your money at once, but rather a little at time. This means you will not be as greatly affected by the events happening right now. As you approach the day that you will use your long-term savings, move them over gradually to your short-term savings, i.e. your savings account. Then you know how much you have.
“Risk” means variation In order to improve their return, many people opt to take higher risk. Higher risk often means that the value of the savings could fall, but the value could also rise. The higher return is payment for the saver taking the risk that the value will fall.
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FAQ: Is the stock exchange dangerous? The stock exchange is an indication of what people think about the economy. The economy then develops at its own rate. Even if many people perceive the past decade as having been economically uncertain, the world's economy has never been stronger. Since 2000 the world economy as a whole has grown by 53 per cent. The fact that several countries have had problems with their economies has been a drop in the bucket.
Broad global funds are a good way to start saving in mutual funds. An alternative to saving in global funds is to save in funds that target specific regions, countries or industries, but there will be a greater risk associated with these funds.
Fonder
Read more about all of the alternatives in the Funds brochure (currently only in Swedish). 1
Short- and long-term savings After 10 years
Advan tages
Disadvantages
Risk of loss
SEK 100 in a savings account*
SEK 122
Safe growth
Lower growth
No
SEK 100 in a global fund**
SEK 163
Higher growth
Varied growth
Yes
* 2% interest after tax ** 5% return
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Low interest rates basically give no return There is one optical illusion in the savings world that costs a lot of money unnecessarily. Savings accounts promise maybe 1–3 per cent interest, but in reality they often do not generate more buying power one year later. This is because of inflation. Coffee and gas cost more, which means that even if there is more money in the account, you cannot buy more items. The savings account in practice therefore only gives a net interest rate of 0 per cent. For a horizon of a few months, however, the savings account is still the best option, since you will still be using the money soon. It is also a given that you need to use a different form of savings for money that must wait longer, if you want your money to grow. The effect is larger than what many people realise. Here is one simple example. If you save SEK 100 for 20 years in a savings account with a 2 per cent interest rate, you will have SEK 150 in the account, but onethird of the real value (SEK 50) will have disappeared in inflation. You will not have received any payment in return for saving. If you instead put your long-term savings in global funds, you can avoid losing all of the value even if the value of the savings varies. Normally, it is reasonable to expect 3 per cent growth after adjustment for inflation.
Reduction in value of savings after ten years Value you see in the account
Actual value (after adjustment for price increases of 2% per year)
SEK 100 in a savings account*
SEK 122
SEK 100
SEK 100 in a global fund**
SEK 163
SEK 134
* 2% interest after tax ** 5% return
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Right balance offers both growth and security Combining a savings account with a global fund allows you to both slow and accelerate your savings. If you choose to have a lot of money in your savings account, you will see a low rate of growth. If you choose to have a lot of money in equity funds, your savings will vary significantly more in value. With the right balance between short-term and long-term saving, you can adapt your approach to meet your needs. If you have half of your savings in a savings account with interest and half in global funds, you will on average gain one per cent after adjustment for inflation. If you choose to have three-fourths in the global fund, you will gain two per cent growth. In other words, the decisions you make have a large effect. It is easiest to move forward slowly.
1. Less inexpensive appropriate for most people When you choose your form of savings, you can choose between different fees. In general, low fees are best for most savers, since most funds post returns that are close to the average. Low-cost funds often cost only 0.5 per cent of the saved
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FAQ: What does an inexpensive fund cost? 0.4 per cent per year is cheap for a global fund. 0.4 per cent per year is cheap for a Sweden fund. 0.8 per cent per year is cheap for a growth market fund.
amount, but a normal fee is 1.5 per cent. This one per cent becomes very important if the funds perform equally. Before you choose, you should also compare how the funds have performed earlier.
2. Low tax a possible option For the past few years, it has been possible to select the tax on your savings. Expressed simply, there are two taxes to choose from: 30 per cent of the profit or a standard rate of around 0.3 per cent on the savings amount. The Government is offering lower tax for money in long-term savings. For fixed income saving, it is best to be taxed 30 per cent of the profit. This is what you get on a normal savings account. For savings that have better growth, the low, consistent standard tax rate is best. Today, the annual deduction for tax is low, around 0.3 per cent of the entire savings amount. This low, flat tax rate applies to investment savings accounts or endowment insurance. The investment savings account is free-of-charge, while endowment insurance sometimes comes with fees and a lock-in requirement. Even the account you choose may have fees. Endowment insurance normally comes with account fees of 0.7 per cent. This sounds like an insignificant amount, but it costs you at least seven per cent over a ten-year period. And since you are saving with a long horizon, even small account fees become big money. Select therefore accounts that preferably do not have fees. Most banks and financial companies offer them. The investment savings account is the simpler choice.
3. Spread out your buy and sell dates Since the value of your units in a global fund varies, it is best to buy and sell at several different times. This way you do not need to worry about temporary upswings or downswings, but rather are simply along for the ride. The easiest way to do this is to save on a monthly basis. If you are going to invest a larger amount in, for example, a global fund, it can be a good idea to do this 3–4 times over an equal number of quarters. This gives a more even outcome. The same thing applies when you want to use the money you have placed in a fund. Sell well in advance, preferably 3–4 times over a period of several months. It is then easier to predict how much money you have to work with while at the same time safeguarding your increase in value.
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Simple decisions are important Money is simple, if you want it to be simple. You can leave complicated decisions for others. When you do it simply, the picture becomes clear and manageable. You will then be more satisfied and less unsure. Choose a savings account that has deposit insurance. Choose inexpensive equity funds with large fluctuations, for example global funds. Choose forms of savings with as low fees and tax as possible. These steps will allow your money to grow more, and you will keep much more of it for yourself. It is not difficult. Give it a try!
FAQ: Are advisers to be trusted? By law, an advisor must protect the interests of the customer. As a customer, in other words, you should receive advice that is suited to you and your situation. At the same time, advisers are working on behalf of their employers. You must therefore decide what you want and need to know. Carefully read the documents you receive from the advisor and find out if the advisor receives payment in the form of commissions if you choose the proposed form of saving. Also ask your friends. Never sign any papers that you do not understand!
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BORROWING Why do we borrow? By both borrowing and saving, it is possible to re-distribute your income to best meet the needs of your current life situation. Taking on a loan means that your expenses will rise in the future, and thus your financial vulnerability. A loan increases your expenses in the future, decreases your financial freedom and increases your vulnerability.
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A loan increases your possibilities and your vulnerability When does taking a loan increase your possibilities? Well, for example when starting a business, studying or purchasing a home. But taking a loan also increases your vulnerability in the event that you become ill or lose your job, which means your income will fall. Or in the event that your expenses may rise as interest rates rise. Housing prices can fall and if you you are forced to sell, for example if your relationship ends, you may not be able to pay off the loan in full. As a borrower you therefore need to have good protection through insurance and make sure that the value of your assets as a minimum correspond to your loans. This means you can pay off the loans if necessary.
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A loan does not solve the problem of not having enough money, it only makes it hurt more.” If you can't afford to save, you can't afford to borrow money.” You might end up in debt if you take too long to fix a financial problem.”
Borrowing – for what? By borrowing money, you will be able to purchase something that you do not have time to save up for within a reasonable period of time. Studies and housing are the most common reasons to take on a loan, but people also borrow money to buy a car, camper or boat. Loans and savings vary throughout our lifetime. Loans are normally largest for the youngest households. As the years pass, the loans are paid off, income rises and savings increase. Loans are often smallest and savings largest when we retire. The largest part of households’ loans are mortgages (90 per cent). It is less common to borrow for consumption, and only 10–15 per cent of households have consumption-based loans.
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How does it work? When you take on a loan you are buying a service. You are a customer and borrower. The company that provides the service is the lender. The Consumer Credit Act contains rules for loans that are issued to consumers. For example, the effective interest rate of the loan must always be provided. This can be used to compare the price of loans since it takes into consideration all types of costs. According to the act, the deciding factor for whether or not you are granted the loan is your ability to pay it back.
As a private person, it can sometimes be difficult to follow the technical terminology. Ask if there is something you do not understand.
Credit assessment When applying for a loan, the lender conducts a credit assessment. This assessment is the first step in determining if you can repay the loan. Your income minus your expenses must also cover you increased expenses. The lender also orders a credit check. This will show your taxable income and whether you have a record of non-payment. A payment that has been taken over by the Swedish Enforcement Authority and not been paid on time creates a record of non-payment. This usually means a loan application will be denied immediately.
Are you starting a new company? Contact NyfรถretagarCentrum and industry organisations!
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For people who have their own company and need a loan, strict d emands are often placed on providing information about the company’s finances and plans.
Security Pledging security for a loan, “collateral”, seldom has an impact on the possibility to get a loan but may affect the terms. Without collateral, the risk is higher for the lender and the cost is normally higher for you. A loan that does not have collateral is called an “unsecured loan”. For large loans, collateral is required, often in the form of property. The lender can sell the collateral if the borrower for some reason is no longer able to pay. Other collateral that can be pledged for loans includes securities, vehicles or guarantees. A guarantee is when another person promises to pay for you if you are not able. The guarantor takes on the debt “as if it were his own”. Guarantor commitments are less common today. If young adults need additional collateral to get a loan, it is common for parents to join them as co-signers on the loan. People who are looking to pledge and borrow against valuable items can turn to a pawnshop.
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Different types of loans Student loans are available from the Government through CSN. They do not have collateral. Loans for homes include mortgages from mortgage institutions and loans from banks. They use the home as collateral. A construction loan is an approved line of credit that is gradually drawn during the period of construction. Photo: Hans Bjurling/Johnér
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Loans for vehicles are set up as instalment plans. These loans use the vehicle as collateral. Loans for consumption include short-term loans, overdraft facilities, instalment plan loans and bank loans. They do not have collateral. Instant loans are consumption loans for smaller amounts and short periods of time. They do not have collateral.
Student loans Approximately 1.4 million people in Sweden currently have a student loan. These loans are government loans that are administered by CSN. Students are also able to receive a grant that does not need to be paid back.
Conditions Student loans are normally paid back over a period of 25 years. The interest rate is an average of the government lending rate over the past three years. The interest rate is calculated in such a way that it is not deductible in tax returns. During the repayment period, there is a safety net in the form of life insurance and the possibility to request reductions in the annual amount in the event of drastically lower income.
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Housing loans Types of housing Sweden has a number of different types of housing: rental apartments, tenant-owned apartments, single-family homes and freehold apartments. Single-family homes and freehold apartments are property. When you buy property, you become its owner. You make decisions about and are responsible for its maintenance. The rental apartment offers the lowest level of responsibility and does not require having a large amount of cash in your bank account. The property owner decides on the standard and the maintenance. If you purchase a tenant-owned apartment, you purchase the right to live in the apartment and you become a member of a tenant-owners association. The association owns the property and the tenants manage it themselves. A board of directors is appointed to take care of administration, maintenance and finances. In the actual apartment, you are responsible for the internal maintenance, for example wallpaper and kitchen appliances.
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Properties and tenant-owned apartments are sold and purchased on the housing market, which means that the price can change. When buying a new home, it is the difference that is most important.
Cash payment In order to buy a home, you need to pay part of the price in cash, at least 15 per cent. This margin gives you a buffer to handle the risk that prices may fall and to prevent you from placing your finances under extreme duress. You are able to borrow the rest and use the home as collateral.
CA S H PAYMENT AT LEAST
15 %
The purchase itself Purchasing a single-family home, a property, is one of the largest transactions you will conduct in life. Carefully research the condition of the home and whether it meets your needs and finances before you decide. The purchase itself takes place in two steps. First, you sign a contract of sale, which specifies the terms of the agreement, and pay the down payment. On the date of occupancy, you sign a bill of sale and pay the outstanding amount of the purchase price. The bill of sale is sent, normally by the bank, to Lantmäteriet, which registers you as the owner of the property. Lantmäteriet is the authority that administers the registration of all of the country’s property. The original bill of sale is then returned to you. This is a document of value. When you buy a tenant-owned apartment, you also need to investigate the finances of the association. How large are its loans, how high are its interest rates and when can they be renegotiated? Find out the apartment’s percentage of the association, the apartment number and any planned maintenance. When you have purchased the apartment, you are registered with the association’s register.
Pledging In order to borrow against a property, you need to mortgage (reserve) a certain amount. The property is mortgaged at Lantmäteriet and an electronic mortgage deed is created as proof of the mortgage. The lender receives this deed as collateral. Issued mortgage deeds can be reused.
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Costs when buying and borrowing There are charges in the form of Cost of title registration and mortÂgage stamp duties deeds: associated with registering the title A single-family home costs SEK 3 million and creating mort– stamp duty: SEK 45,000 gage deeds. The Mortgage deed of SEK 2 million registration charge – stamp duty SEK 40,000 is 1.5 per cent of the purchase price and the charge for new mortgage deeds is 2 per cent of the mortgage deed amount. There are also additional fees. If you take out a loan on an existing home, you may need to have it valued. The lender uses the market value to determine how large of a mortgage you may receive.
Interest, etc. You normally pay interest on a loan. How much interest you will pay depends on the interest rate, which is given as a percentage, and the amount of the loan. Interest expenses are deductible in your tax return. In general, this will reduce the cost of your loan by 30 per cent.
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Included in an interest rate: borrowing cost, administration, capital adequacy (by law, for risk-taking) and profit.
In addition to the interest rate, there may be other costs, such as set-up costs and invoicing costs. The interest rates on loans vary mainly depending on the type of collateral of the loan. Unsecured loans are most expensive. Mortgages in the form of “bottom loans” are safer for the lender and often cheapest, while a “top loan” can be more expensive. The line between a bottom loan and top loan normally is drawn at 75 per cent of the value of the home. The credit market is subject to free competition. As a customer, you are A loan without interable to investigate where you can get est is not automatically the best terms and price. Compare a “free” loan. Check banks and mortgage companies and the effective interest see who will give you the best offer. If you are a member of a union, there may also be agreements that offer attractive terms for union members. When comparing interest rates, it is important to check what the effective rate is, since this is the rate that takes into account all of the costs associated with a loan, i.e. the actual interest rate and any additional fees. Interest rates vary over time. The Riksbank uses the repo rate to control the level of the money market, which is where securities with short maturities are traded. The Riksbank is responsible for the monetary policy with the objective of keeping inflation low and stable. Avoid fixing the inter-
est rate for a long Fixed interest rate periods for bottom loans vary in length. The period of time if you level of the interest rate is related to plan to move soon. the market rates. Short periods of fixed interest, three months, follow the money market, while longer periods of fixed interest follow the bond market. However, it is the lender who decides the interest rate that applies to the loan, and as the customer you should evaluate this offer.
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Variable or fixed? A variable rate is best from a financial point of view when interest rates are falling or standing still, but a fixed interest rate is best when interest rates are expected to rise, so you can prevent an increase in your interest rates. Compare the fixed rate against the variable rate to make the best choice! Selecting a fixed interest rate is a good alternative if you want to know what your costs will be for a set period of time. Having both a variable loan and a fixed loan is one way to spread risk. A fixed loan can be repaid early if necessary, but this can be expensive since the lender must be reimbursed for the remaining interest. If you want to switch banks, loans that mature at different times require monitoring to ensure that you get the agreed interest rate when the new bank later takes over the loan.
Amortisation If you have large loans, you also need to pay off the actual debt, which is called “amortisation�. This is not a cost for the loan, but rather savings, although you can only access the savings first when you sell. Amortising is a sure way to save. You know that you are decreasing your debt, and you know your return (the interest rate on the loan). Inflation also affects the value of the loan. As the years pass, the debt remains in nominal value, i.e. the amount in SEK), but salaries and prices rise. This automatically means that the value decreases, like an amortisation.
In order to give yourself more freedom and spread your risk, it is a good idea not to concentrate all of your saving to only amortisation.
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What is most important when buying a home is to lower your vulnerability to the risk that your income or the price of your home will fall. Top loans must be amortised over 10–15 years. Continue then to amortise the bottom loan, but preferably combined with another form of savings.
Housing costs Your bank can help you calculate the costs of your home through online calculators that contain most of the expenses associated with owning a home. For a property, these costs include interest, amortisation, heat, electricity, water and waste, trash collection and property fees. Another cost is home insurance. Sometimes there are also site leasehold fees, community association fees or road charges. Also, consider maintenance and repairs. This cost can vary, but it could be a good idea to reserve SEK 1,000–2,000 per month in order to avoid having to increase your loan too often. The cost for a tenant-owned apartment includes interest, amortisation, the monthly association fee and electricity. Remember that you will need tenant-owned apartment insurance and even a buffer for maintenance. Calculate the cost of interest after tax deductions (worth 30 per cent on amounts up to SEK 100,000 per borrower and 21 per cent on amounts above 100,000). For more information, visit www.konsumenternas.se
Senior loans Pensioners who do not have sufficient income to meet repayment requirements but have considerable built-up equity in their home can apply for a senior loan. You do not need to use your income to pay for interest when you have a senior loan. A larger loan is granted than what is paid, and over the years the debt increases gradually as the cost of interest is added to the loan. A senior loan could be an option for pensioners who want to stay in their homes but need money for renovation, for example, or have easy access to a rental apartment when the time is right and therefore will not need the capital built-up in the home.
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Car loans It is possible to borrow money to purchase a car, another type of vehicle or a boat if the seller is a company. If you purchase a car from a private person, you need to inspect that the car really is paid for and that there are no loans attached to it. If you need to borrow money to buy a car from a private person, it is possible to apply for other loans, such as member loans via a union or a regular bank loan.
Down payment You normally need to put down at least 20 per cent of the purchase price in cash. If you turn in your old car, this also can be included in the cash payment. The rest you can borrow, if you are approved.
Interest and amortisation The interest rate on a car loan changes as the interest rates change.
Consumption loans Savings give you the ability to be more free in your actions, but in some cases it can be nice to have the possibility to borrow for consumption. Consumption loans can be risky if they are used as a solution for the problem of not having enough income to cover expenses. Once the loan is signed for, this just means more expenses that the income will not cover.
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Several alternatives • Credit cards. Pay the entire debt the next month or distribute the payment across a longer period of time. Consider whether or not you want to pay over time since this can be expensive. Interest rates are often high. • Overdraft protection. You may withdraw more money than what is in the account, but you are responsible for adding money to the account. If you are always in the the negative, this is an expensive way to make your day-to-day finances work. • Normal unsecured bank loans. Union members may have the right to apply for member loans. Instant loans, also called SMS loans, have created problems for many people. They are easy and fast and therefore an appealing alternative when facing economic problems.
Other things to think about Safety net When borrowing money, you need to protect your income from the risk that you will become ill, lose your job or suffer an accident. You can get insurance in addition to social insurance and collective agreements. Survivor coverage does not offer a lot of protection if there are no minors at home. The survivor coverage associated with occupational pensions varies considerably. It is therefore important for your own sake to find out what applies to you and your survivors and think about the arrangement that you would like to have and if extra life insurance is needed. It is important for borrowers to have proper life insurance. Group life insurance policies are cheapest, but often end at the age of 65.
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Family law Buying a house raises the importance of family law. As long as you live together, it does not matter if you are co-habitees (sambo) or married. Each person owns their assets and is responsible for their debts. It is first when a relationship ends that differences in the law come into play. The Co-habitees Act and the Marriage Code contain rules for how the value of common assets should be divided. In brief about co-habitee and marriage status: • A co-habitee is entitled to request the partition of joint property with regard to a common home and common household goods – regardless of who paid for them. No other assets are included in a partition of joint property. • Property is considered joint property if it was bought to be used together. • In a cohabitation agreement, you can agree that there will not be any partition of joint property with regard to the home. • If one of the co-habitees moves in with a third person, they are not entitled to request a partition of joint property. • Co-habitees do not inherit from one another. It is a good idea for cohabitees to have a will. • Married couples are subject to the matrimonial right to property. Married couples share the total value of all belongings. • If you do not want something to be included in a partition of joint property, you need to include this in a prenuptial agreement. • Married couples inherit from one another if they only have children together. Children to only one person of a couple, step-children, inherit directly from their parent. It is a good idea for married couples with step-children to have a will. • Sometimes life insurance is needed, for example so a child can receive his/her inheritance without the survivor needing to sell the home.
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Independent help for consumers As a private person, you can contact the Swedish Consumers’ Banking and Finance Bureau for free information and guidance in questions related to savings, payments and loans within the banking and securities sector.
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When making a decision The www.konsumenternas.se website (banking and insurance) contains information about different types of financial products and what you should think about when receiving financial advice. The website offers comparisons of savings accounts, mortgage rates, senior loans, IPS and credit cards to make it easier for you to make a decision. The website is a joint website shared by the Swedish Consumers' Banking and Finance Bureau and the Swedish Consumers Insurance Bureau.
Saving There are many ways to save or invest money. This website contains information about savings accounts, funds, securities, investment saving accounts and endowment insurance. You can also see a comparison of the interest rates and terms for most savings accounts offered by different institutions in Sweden and a list of all of the accounts that have deposit insurance. You can also read about deposit insurance and investor protection.
Financial advice Banks, insurance companies, insurance intermediaries and securities companies offer advice on financial investments. Regardless from whom you receive advice, there are laws that protect your interests when you receive advice. The main purpose of this protection is to ensure that you receive advice about investments that is suitable given your specific financial circumstances and needs.
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Borrowing This website also contains general information about what you should consider when borrowing money as well as an explanation about your rights and obligations with respect to the lender. It also has a check list to guide you through the most important steps of the borrowing process and calculators to help you see what the total cost for your loan would be, how much the interest will cost and what it would cost to repay the loan early. • Mortgage calculator – when buying a home. • Loan calculator – when you want to know, for example, what an unsecured loan or car loan will cost. • Lending Lab – when you want to gain an overview of all of your loans and calculate how changes in interest rates in the short-term and the long-term will affect your monthly cost. • Interest compensation – what you have to pay to the bank if you pay off your fixed interest rate loan early.
When you are not satified with a decision You can turn to the consumer bureaus when you have received unsatisfactory information from a financial company or your bank. If you decide to pursue the matter, you can receive guidance and information about where you can turn to request a review. The consumer bureaus, however, are not able to act as your legal representative.
Legal cases and decisions The website contains a legal database that can give you an idea of the position of the courts and the Swedish National Board for Consumer Complaints in previous rulings. There you will find brief descriptions of court cases and decisions by the Swedish National Board for Consumer Complaints.
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Ten questions about saving and borrowing 1. Which two types of saving make a good combination? A Salary account and savings account. B Savings account and shares. C Savings account and bonds. 2. What is the most important requirement for a good bank account? A Low, consistent interest rate. B High interest rate and deposit insurance. C High interest rate and lock-in. 3. What is a global fund? A An investment in globalisation. B The broadest possible equity fund. C A fund without a pre-determined focus. 4. What does a global fund offer? A Interest rates in global banks. B Shares in the industrial company, Global. C Returns from several countries and markets. 5. How are savings affected by inflation? A It makes the return on the savings account after adjustments for inflation close to zero in the long run. B It does not have any effect at all. C It makes the fund more expensive in the long run. 6. What is amortisation? A The cost of the loan. B The monthly payment to the lender. C Repayment of the loan.
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7. What is most important when applying for a loan? A That there is a home to use as collateral. B That you do not already have any loans. C That you have the ability to repay the loan. 8. Which of the following statements is true? A Mortgage deeds that have been used as collateral for a repaid loan can be used again. B Mortgage deeds in a tenant-owned apartment are a document of value. C Mortgage deeds that have been used as collateral for a repaid mortgage cannot be used again. 9. What is an unsecured loan? A A loan with collateral in a durable good, for example a car. B A loan without collateral. C A loan with a co-signer. 10. What is the effective interest rate? A The interest rate that offers the most effective repayment of the loan. B The comparative interest rate that includes both the interest rate and fees. C The lowest interest rate.
The answers are found on page 46
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GLOSSARY
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Amortisation
Repayment of a loan. Amortisation decreases the amount of the debt, which in turn decreases the amount of the loan on which you pay interest.
Bond funds
A fund that invests in long-term fixed income instruments, i.e. with a maturity of longer than one year, such as bonds. Also called a “long fixed income fund”.
Bottom loans
Loans that are normally not larger than 75 per cent of the value of the home.
Cash payment
When purchasing a home or a good, it may be necessary to pay part of the price with your own money. The recommendation for a home is at least 15 per cent of the price is paid in cash; for a car the requirement is 20 per cent.
Construction loans
Loans for a property during the period of construction. The loan can be drawn in stages.
Credit cards
A line of credit on a credit card. Once the debt is paid, the cardholder has a right to use the card again.
Credit check
Information from a credit information company about a private person’s or a company’s record of non-payment, income and debts.
Creditor
Another word for the holder of the claim, i.e. the lender, the party to whom you owe money.
Debt restructuring
Restructuring of a private person’s debts that normally entails that the indebted person through a payment plan must live at the minimum subsistence level for five years. After this period, the payment liability for the remainder of the loans is waived. Decided by the Swedish Enforcement Authority.
Debtor
A person, either natural or legal, who has a debt to another party. A borrower is a debtor.
Deposit insurance
The state insurance scheme for the money you have deposited with banks, credit market companies and securities companies. The insurance pays up to SEK 950,000 per person and savings institution in the event of a bankruptcy.
Down payment
Part of the price paid in advance when the agreement is signed, for example when purchasing a home. The rest of the price is paid later when you gain access to the home.
Due date
The day a bill must be paid.
Effective interest rate
A comparative price that shows whether a loan is cheap or expensive. Includes all of the costs of the loan (interest rate, invoicing fees, set-up costs, etc.) and is expressed as a percentage.
Endowment Âinsurance
Savings that are not deductible in the tax declaration and where payments are not subject to income tax and capital gains tax. The insurance pays a flat tax rate.
Fixed income fund
A fixed income fund is a fund that invests 100 per cent of the net asset value in fixed income instruments, i.e. bonds and treasury bills.
Freehold apartment
A type of home where the owner holds the title to an apartment. A freehold apartment is a separate property. The responsibility for common areas falls to a building association in which the owners are members.
General funds
A type of equity fund that focuses on Sweden and the global market. Previously subject to a favourable tax rate.
Global fund
The broadest and most widespread form of an equity fund.
Growth market fund
An equity fund that invests in growth markets, also called emerging markets. Growth markets currently include Eastern Europe, large parts of Asia, Africa and Latin America
Guarantee
To provide a guarantee is to promise to pay a debt on behalf of another person if that person fails to pay. The person making this promise is called a guarantor.
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Instalment plan purchases
A purchase where you first pay a deposit and thereafter the rest of the money in instalments in accordance with an agreed payment plan. Interest and credit costs mean that you will pay more than the purchase price. The seller is able to ask the Swedish Enforcement Authority to repossess the item if you do not make the payments in accordance with the agreement.
Interest rate
An interest rate is stated as a percentage. The interest expense depends on the interest rate and the amount of the loan.
Investment savings account
A form of savings that is intended to make it simple and suitable for regular investors to invest in financial instruments, for example shares and options. The account pays a flat tax rate.
Investor protection
Similar to the deposit insurance but the protection of up to SEK 250,000 covers the securities you have bought through, for example, a bank or securities company. Cash can also be covered by the investor protection.
Joint and several payment responsibility
When several people are jointly responsible for paying a loan, they each share an equal responsibility for repaying the entire loan.
Loan commitment
A promise in advance about how much of a loan you are able to take, for example before buying a home.
Mixed fund
A fund that invests in both shares and interest-bearing securities. The distribution of shares and interest-bearing securities varies depending on the fund, and investments are determined by the fund’s expressed strategy.
Mortgage deed
Proof of registration of a lien on a property. Mortgage deeds are digital and registered in the property register at Lantmäteriet. A stamp duty is charged for new mortgage deeds. Mortgage deeds are used as collateral for a mortgage. A mortgage deed that has been borrowed against once can be used again in the future for a new loan once the old loan has been paid.
Mortgages
Loans that use a home as collateral.
Overdraft protection
A granted right to use more money than you have deposited in your bank account.
Property
A property is a piece of land with buildings and other fixtures, e.g. a fence, postbox and fruit trees. There are also three-dimensional properties. This is a special part of the structure. The person who owns a property is the registered owner. Several people can own a property.
Record of non-payment
A record of non-payment shows that you have not made the payments according to the agreed terms. The record of non-payment is registered at a credit information company for three years. Having such a record may mean that you will be denied a loan, petrol card, rental contract or telephone subscription.
Registration
When a mortgage deed is generated for your property, you apply to the bank to register the lien with Lantmäteriet. A mortgage deed is proof of this registration.
Rental apartment
An apartment that a property owner provides to a tenant in exchange for rent. The property owner is responsible for all maintenance and care.
Repayment ability
Calculation of the difference between a household’s income and expenses to determine whether or not the household can be granted a loan. The loan will increase the household’s expenses and borrowers are expected to have sufficient income to handle such an increase. According to the Consumer Credit Act, this is the most important part of the credit assessment.
Risk
Risk refers to the variation in value. High risk means that the value can rise or fall sharply.
Savings account
An account at a bank or a credit market company with a specified deposit rate and which often is protected by deposit insurance.
Security
An object that can be pledged for a loan. Also called “collateral”.
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Senior loan
A granted line of credit on a home, where part of the loan is paid out in cash and the rest pays off the interest rate cost over time. A loan for people who are not able to repay a loan but have built-up equity in their home.
Shares
Ownership in a limited company
Stock exchange
Where you can save at a potentially higher but more inconsistent rate of return in companies through equity funds or shares. The value of the investment can rise and fall.
Structured products
Securities that consist of several different types of financial instruments.
Taxes
There are different tax rates for different types of savings, either 30 per cent on the profit or a flat tax rate of around one per cent of the capital every year. Applies to investment savings accounts or endowment insurance.
Title registration
The person who owns a property holds the title and is the registered owner. Ownership is registered in the national register at Lantmäteriet.
Top loan
The part of a mortgage that corresponds to the value that in most cases is greater than 75 per cent of the value of the home. Normally at the most 10 per cent of the value of the home. Top loans are normally amortised over a period of 10–15 years.
Unsecured loans
Loans where there is no security in the form of pledged collateral, but rather the loan is granted solely on faith in you and your ability to repay the loan. The interest rate on these loans is usually higher.
Check list for balancing assets and liabilities The following is a list will help you make better decisions about saving and borrowing. 1. Get an overview of your overall saving Gather documentation from all of your savings, i.e. funds, pensions, bonds, shares and cash. Only then will you be able to gain an overview and apply a holistic approach.
2. Create a balance Divide your money into three piles: wallet, pantry and garden. Your “wallet” money is withdrawn on a regular basis. “Pantry” money is money you want in close reach and “garden” money is money that can grow. How long they will grow can vary, but you will probably use part of your savings in more than five years.
3. Select a form of saving for each pile Choose a form of saving that fits your investment horizon. It is easiest to put your money in the “wallet” and “pantry” in a savings account. These accounts have a short investment horizon. For mid-range “garden” savings, you can choose global funds. Long-term savings, i.e. five years or more, can be invested in part in funds that invest in emerging countries. There are multiple forms of saving to choose from, but these three are easy for beginners.
4. Pay a smaller or no fee Many people pay high fees on their savings. Negotiate or move your pension insurance, investment accounts and endowment insurance to investments with low or no fees.
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5. Choose your tax rate Choose a normal 30 per cent tax rate for the interest on your wallet and pantry money. Choose an annual flat rate at around 0.5 per cent of the capital for money growing in your “garden”.
6. Calculations Even if you are granted a loan, make sure that you calculate yourself how much you will have left for things other than housing and loan expenses. It always costs money to borrow money.
7. Do not make it a habit to borrow money for consumption If you are not able to save in advance, it does not become easier to pay after-the-fact. And primarily – do not take on new loans if you are having problems paying your previous debts!
8. Pay off your loan at the right speed Repay your loans as a minimum at a rate that ensures they do not lose their value. Then you always have something to sell if you were to have problems with your finances.
9. Think about the cost of interest The longer it takes you to pay off a loan, the more expensive the total cost of interest.
10. Be price-conscious! Get quotes from different companies when applying for a loan so you can get the best terms possible. Find out what the effective rate is so you can compare loans. Even an interest-free loan can have high costs.
The correct answer to “Ten questions about saving and borrowing”, pages 38–39: 46
1B | 2B | 3B | 4C | 5A | 6C | 7C | 8A | 9B | 10B
Helpful links and telephone numbers Swedish Consumers’ Banking and Finance Bureau www.konsumenternas.se, tel. 0200-22 58 00 – on the Swedish Consumers’ Banking and Finance Bureau’s website you will find impartial and free guidance about, for example, banks, insurance, telecom and electricity. Swedish National Debt Office: www.riksgalden.se, tel. 08-613 45 00 – the authority that is responsible for the deposit insurance and the investor protection. NyföretagarCentrum: www.nyforetagarcentrum.com, tel. 08-14 44 00 – foundation that promotes new business and entrepreneurship. OmBoende: www.omboende.se – offers consumers and other concerned parties easily accessible and reliable information about questions related to buying, selling, owning, building and renting a home. Centrala Studiestödsnämnden (CSN): www.csn.se, tel. 0771-276 000 – the authority that handles the state-run student grants and loans. Lantmäteriet: www.lantmateriet.se, tel. 0771-63 63 63 – the authority that is responsible for the registration of property in Sweden.
Hallå konsument!: www.hallakonsument.se, tel. 0771-525 525 – independent guidance through the Swedish Consumers Agency in collaboration with other authorities, consumer bureaus and municipal consumer advisory services . Swedish Investment Fund Association: www.fondbolagen.se, tel. 08-506 988 00 – statistics, fact, surveys, etc. Fondkollen: www.fondkollen.se – impartial information about saving in funds, and tools and valuable examples, applicable to all fund saving. Swedish Enforcement Authority: www.kronofogden.se, tel. 0771-73 73 00 – information and guidance for how to make payment or receive payments. Swedish Tax Agency: www.skatteverket.se, tel. 0771-567 567 – help and information about, for example, taxes, social security contributions and deductions. Svenska Dagbladets interest rate map: www.svd.se/naringsliv/ sag-din-ranta/ – interest rate tool if you want to compare and report current mortgage rates in different areas.
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© FINANSINSPEKTIONEN. GRAFISK FORM: YRA. TRYCK: ÅTTA45 2015.
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