* Swedish household debt-to-income ratio above 170 pct
* Four in 10 mortgage borrowers not repaying capital
* IMF says financial instability an increasing concern
* Politicians steer clear of remedies ahead of Sept. 14 poll
By Mia Shanley and Johan Ahlander
STOCKHOLM, Aug 24 Johan and Alejandra are the kind of Swedes the IMF has been warning about - piling up debt to keep up with an ever-rising property market and fund a lifestyle of travel, maids and nights out.
The couple plan to buy a flat in Stockholm for 5 to 6 million Swedish crowns ($724,000 to $869,000), initially with an interest-only bank loan, among other spending plans.
"I may travel, I may want to invest in a new business," said Alejandra, who runs a cafe in the city centre.
Less than a month away from a general election, there are no votes in campaigning to stop the credit flowing, but there are fears that such Swedes could be the Achilles heel of a country that boasts a coveted AAA score from credit rating agencies Fitch and S&P.
Four in 10 mortgage borrowers in Sweden are not paying off their debt, and those that are repaying the principal do so at a rate that would on average take nearly a century.
Swedish property prices have nearly tripled in just two decades. In July, home prices rose at a double-digit pace from a year ago - the first time in more than four years.
The IMF has warned financial instability in Sweden is an increasing concern and urged a comprehensive set of macroprudential measures to temper soaring mortgage debt. Nobel Prize laureate and economist Paul Krugman has chimed in, saying Sweden probably has a significant housing bubble.
With Sweden's household debt-to-income ratio above 170 percent - among the highest in Europe and rising - the issue is worrying Riksbank policymakers. Out of fear of spurring more borrowing, the central bank has kept interest rates higher than warranted by inflation, but they are nevertheless at historic lows.
The main concern is that private consumption - which makes up nearly half of Swedish GDP - would suffer if rates rose or property prices fell, which could spell problems for the lenders and the economy, which is only just finding its feet.
FEELING THE HEAT
May and Philip, who have just bought the house of their dreams in a northern Stockholm suburb - a place where they can sail in the summer and ski in the winter - are already feeling the heat.
With borrowing costs at historic lows - the couple pays about 2 percent - they can make ends meet. It's the future that worries them.
"We can't afford a 5 percent interest rate with amortisation (principal repayment) on our salaries," said May. "At 8 percent, if the bank doesn't give us a break from making payments on the principal, we'll lose our house."
Sweden knows all too well the damage that a property bubble can wreak when it bursts.
Financial deregulation in the 1980s led to a boom in commercial property that crashed in 1992. Commercial properties lost nearly two-thirds of their value and Sweden had to nationalise two of its banks.
The country was in recession for three years and had to implement a tough austerity programme to turn around a massive budget deficit.
Economists are urging pre-emptive measures like property takes and a cut in tax deductions, but it's a delicate topic ahead of the Sept. 14 elections.
"I'm an economist - I love the property tax," said Magdalena Andersson of the poll-topping Social Democrats, who is widely tipped to be Sweden's next finance minister. "But the Swedish people hate it and don't want to pay it, so let them pay other taxes," she told Reuters in an interview.
Swedish property taxes as a percentage of GDP are at the low end for OECD countries, and only one-third that of the United States.
Politicians are also sidestepping suggestions to scale back interest rate deductions on mortgages, though most agree it would be highly effective in cooling prices.
"Neither side wants a discussion about property taxes nor interest rate deductions in a pre-election campaign - it's politically unpopular," said John Hassler, Professor of Economics at Stockholm University's Institute for International Economic Studies, who had both Andersson and Sweden's current finance minister as his PhD students.
The politicians are reluctant with good reason - the Social Democrats' tough stance on maintaining high property taxes was a major contributor to their defeat in 2006.
Some argue that the risks are manageable. They point to a high level of savings and attribute the sharp price rise to a short supply of new homes.
A Swedish household's total assets, made up of financial assets, savings and real estate, are about three times as big as its total debt, prompting some economists such as former Riksbank deputy governor Lars Svensson, to argue there is no problem.
High private debt should also be seen against a backdrop of relatively low public debt - Sweden is forecasting a debt-to-GDP ratio of just 41.3 percent, which gives it a degree of resilience.
What most politicians do agree on is the need to shift away from interest-only mortgages.
Such mortgages helped inflate Ireland's disastrous property boom. The country's central bank warned last month that almost half of them were due to revert to full payment in the next two years, ramping up the threat to the country's recovery.
Sweden's centre-right government has asked regulators to come up with a plan to force repayment schedules. It has set a November deadline - which if opinion polls are right will be two months after it loses power to a centre-left opposition.
The Social Democrats have not laid out plans on the matter.
Other Nordic countries are facing similar problems, even though Norway's economy is in better shape than Sweden's, and the Danes also have substantial savings.
In Norway, household debt is around 200 percent of disposable income - twice the euro area average - and Denmark's is even higher - at 300 percent and among the highest in the world.
Regulators in Norway and Sweden have already tried using loan-to-value caps for mortgages - now at 85 percent - and higher risk weights on mortgage portfolios to counter imbalances.
But prices are heating up again in Norway. The country's top real estate association had expected prices to fall 1-3 percent in the country this year, but it has now revised that to a rise of 2 percent and accelerating.
Property prices in Denmark are still below pre-crisis levels but the market has been getting warmer since late 2011.
In Sweden, it is already hot.
At a recent viewing of a two-bedroom flat in central Stockholm, a crowd of people packed into the 92-square-metre (990 sq feet) space for a 30-minute glimpse of what later sold for $1 million after a four-day bidding war - 13 percent above asking price.
Banks say they have already taken matters into their own hands. The Swedish Bankers' Association recommends that loans over 70 percent of the value of a home should be on a capital repayment basis.
SEB says it is trying to get all new borrowers to pay off their mortgages in 50 years.
But Christian Clausen, CEO of Nordea, the region's biggest bank, gets riled when asked about mandatory repayment.
"We need some flexibility," he told Reuters, noting that an elderly couple or a younger couple just getting their careers started may have good reason not to want to repay the principal. "Flexibility is good because not all households are equal."
The banks have long complained about being overregulated relative to their European peers, but in the long term they could benefit from tougher such rules on their customers, if it avoids the kind of property crash that followed the credit-fuelled exuberance in places like Spain and Ireland.
"Structurally, that is an area which some investors see Sweden as a dangerous system," said Nick Davey, an analyst at UBS. ($1 = 6.8842 Swedish crown) (Additional reporting by Sven Nordenstam in Stockholm, Camilla Knudsen in Oslo, Ole Mikkelsen in Copenhagen; Editing by Alistair Scrutton and Will Waterman)