Swedish $370 Billion Home-Loan Market Gets New Mortgage Fund

(Bloomberg) -- As investors wonder whether Sweden’s housing market is headed for a correction, the country’s first mortgage fund is about to enter the $370 billion Swedish home-loan industry.

Stabelo plans to pool capital from Swedish institutional investors in exchange for fixed-income securities. That money will then be lent to home buyers. The fund starts offering its products this week and will work with Avanza Bank AB, Sweden’s largest online lender. Avanza, which owns just below 20 percent of Stabelo, will handle distribution and marketing.

The new fund will hit a market that is showing signs of having reached a tipping point. After years of rapid growth, fueled by record-low rates and a shortage of homes, prices have started to fall. But with strict lending criteria, Stabelo says it isn’t too worried.

“This is the right time to be a conservative mortgage lender,” Hampus Broden, one of Stabelo’s three co-founders, said in a Nov. 10 interview in Stockholm.

“In a market where mortgages are not primarily priced according to risk but on cross-selling opportunities, the best risk-adjusted return is found in the most conservative part of the market,” he said.

Stabelo plans to compete on mortgage rates. According to a statement from Avanza on Wednesday, the home loan offers a pre-approved rate, which for a 3-month term is 1.29 percent. That’s lower than the average bank rate of 1.57 percent, according to Avanza. The new home loan is available to customers with a loan-to-value ratio of a maximum of 60 percent, which Avanza says applies to more than half of Sweden’s total mortgage volume.

Competitive Pricing

“The pricing looks competitive, with a fixed price for all clients at 1.29 percent for three-month variable rate loans, which is 25 basis points below the lowest average negotiated rate from any of the large banks in October for 3-month loans,” DNB ASA said in a note. “We believe non-bank lenders like Stabelo will add competitive threat to the large banks, which coupled with lower volume growth ahead will lead to margin pressure in Swedish mortgage lending.”

While mortgage holders are set to get lower rates with Stabelo’s offering, it also promises higher returns to investors, in part because it intends to keep costs low. Co-founder Michael Ingelog says the fund will be able to operate with lower mortgage margins than conventional lenders.

Sweden’s housing slowdown could even offer opportunities. Ingelog says the return on Stabelo’s mortgage fund could benefit from a correction because the returns on its bonds would increase if credit-spreads in the overall market rise.

Swedish insurance and pension funds have committed “several billion kronor” to Stabelo, said Ingelog. But the fund is open-ended and will accept new investment commitments on a continuous basis, he said.

New Model

The mortgage-fund model is new to Sweden, but is approved by the country’s regulator. It already exists elsewhere, including in the Netherlands. Stabelo’s third co-founder Wilhelm Moberg says loan losses at Dutch mortgage funds were much lower than at banks when the housing market there slumped.

Stabelo’s mortgage fund ought to be able to offer investors better returns than those on the covered bonds used by banks to fund their mortgage lending, Moberg said.

“The initial financing is enough to keep us busy for the foreseeable future,” he said.

©2017 Bloomberg L.P.