* Says should not have strict amortisation rules
* Norman sees no problem with bank dividends (Adds quotes, background, detail)
By Simon Johnson and Johan Sennero
KARLSTAD, Sweden, March 15 Sweden's financial markets minister played down worries about high levels of household debt in Scandinavia's biggest economy on Friday and said that, unlike the central bank, he did not favour banning interest-only mortgages.
Swedish households are among the most heavily indebted in Europe with household debt at around 170 percent of disposable income, up from about 100 percent in 2000, and that has been a factor keeping the central bank from cutting interest rates further after the economy slowed last year.
"It (the debt level) isn't alarming. It is high. Sweden and households themselves would be in better shape if it was a bit lower," Peter Norman told Reuters.
Central bank Governor Stefan Ingves said earlier this month that people should be made to amortise debt by regularly repaying the principal on their mortgages not just the interest.
Norman however said he did not believe Sweden should have a strict rule that mortgage borrowers make monthly repayments, or amortise, to bring down the size of their loans rather than just paying the interest.
He said amortisation of loans was a good thing, but there were periods in life, such as unemployment, when paying off loans was not possible.
"However, I do want to encourage a change in behaviour," he said. If amortisation did not increase, Norman said the government would have to consider other measures.
The government, not the central bank, would decide on whether to change the mortgage rule.
While mortgage rules in Sweden are relatively loose compared with other countries, the country has taken a tougher line with its banks than most in Europe over capital requirements.
The government has also criticised banks for wanting to return capital above the regulatory minimum to shareholders, saying the economic situation did not justify such moves.
Norman said it remained important for banks to have capital levels above the regulatory requirements.
"I think it is suitable and good that they have more capital, and that is the case today," he said.
"They (the banks) have to meet that benchmark right through the business cycle. Things go up and down and they will have credit losses some day."
However, he said that recent moves to increase shareholder payouts by Sweden's big banks were not a problem.
"Even with the dividend levels currently, the four big banks are building capital," he said.
Swedish banks are among the best capitalised in Europe. Last year, Swedbank raised its payout ratio to 75 percent of profit from 50 percent. SEB tweaked its payout target upward and Nordea raised its dividend to 0.34 euros per share from 0.26 euros the previous year.
Nordea, in which the state has a 13.5 percent stake, also got a mandate this week from shareholders to buy back stock. (Reporting by Simon Johnson and Johan Sennero, editing by Patrick Lannin and Susan Fenton)