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A recent survey shows that only a few of the borrowers will link the interest rate even though the base interest rate may have been reached.
On behalf of Nordea, Kantar has recently asked Norwegians if they want mortgages that fluctuate with market interest rates or fix interest rates for a longer period. The survey shows that only one in ten have chosen a fixed interest rate on their mortgage.
– We have experienced a sharp drop in interest rates in a short time with a key interest rate set to zero for the first time, due to the situation of the crown. Still, few peg the interest rate, consumer economist Derya Incedursun in Nordea tells Nettavisen Økonomi.
– Those that tie the mortgage to a greater extent are those with medium-high income. It’s also popular with the 30-44-year-old age group, and there are more women than men who tie the interest rate, it continues.
More than 1,000 people were asked in the Kantar survey, regardless of bank connection. Incedursun says they haven’t done a similar fixed-rate survey before, so they have nothing concrete to compare with.
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Five percent
But the experience of Norwegian banks is that very few Norwegian loan clients link the interest rate. Nordea’s Director of Communications, Synne Ekrem, says that in Nordea’s loan portfolio, fixed-rate loans account for about five percent. Includes clients who have consolidated all or part of the loan.
When asked why Norwegian borrowers do not want to get fixed rate loans, unlike loan clients in other countries, Incedursun responds:
– Good question. For several years it has been said that it is not worth tying the mortgage rate, but sometimes the interest rate has been higher than it is today. And you must wonder how much more interest rates can go down.
– The key policy rate can be negative, and do we also get negative interest rates on mortgages?
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Bad experiences
Central Bank Governor Øystein Olsen did not rule out a negative key interest rate until the summer, but the experiences of other countries are terrifying. And now there are many signs that interest rates may rise earlier than expected by both Norges Bank and the experts. You can speak in favor of fixed interest rates.
– Is there any additional reason to take out a fixed-rate loan now that interest rates are apparently on the ground?
– For those who are unsure of the economy, who have a tight economy and who want predictability, fixed rate loans can be a good solution. What they have to consider is less flexibility, which historically has rarely paid off and which is more of a guarantee of predictability in future expenses.
It’s still a big difference
– But again, how much lower can interest rates go? If you’ve thought about tying the interest rate before, now is the right time, Incedursun responds.
And according to Finansportalen.no, those with the right employee organizations behind them can get a loan of NOK 2 million up to 1.3-1.4 percent interest.
For a fixed rate loan with a minimum fixed term of five years, you must pay at least 1.9-2 percent. Therefore, the interest rate will increase quite a bit between 2022 and 2023, so it will be better to tie the interest rate for five years.
Not free
Incedursiun says that even if the interest rate fell further, the difference from the current level of the interest rate is unlikely to be particularly large. And regardless of the level of the interest rate, it is not free to borrow money, there are always costs associated with obtaining a loan.
Eiendom Norge points out that those who tie the interest rate should be exempted from the stress test and service capacity requirement in accordance with the Mortgage Regulations. One of the requirements here is to support an interest rate increase of up to 5 percentage points.
– Many are up to the limit. Such a large increase in the interest rate will lead to significantly tighter finances, where you will have to give up the lifestyle you have now. Many of these borrowers also have children, so the whole family here must come together to gain control of the economy, says the Nordea consumer economist.
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Large additional expenses
Three out of ten answered in the survey that they will have problems if the interest rate goes up 5 percentage points. For a NOK 2 million mortgage, this basically corresponds to NOK 100,000 in pre-tax annual additional expenses, NOK 8,333 per month. The tax deduction reduces part of the burden.
– But there is still a lot of money, don’t you think that even more will have problems?
– Yes, I think so, because in another survey, half of the respondents did not know what an increase in the interest rate would mean for them. And again, this would mean that you have to spend on these processes. Some need to live stricter, says the consumer economist.
One possibility is to combine a fixed rate loan with a floating mortgage, for example, half of each. For a mortgage greater than $ 5 million in mortgage, you can spend 20 years paying off the loan.
– Few people manage to pay 5 million in a short time. If you inherit 1 million, you can use the inheritance to pay off the floating portion of the mortgage, Incedursun says.
Expensive premium
If interest rates drop and new loans get cheaper, you must pay a presumed premium to the bank to get out of the loan. It can be expensive in the event of a large drop in interest rates, because the bank loses large interest income.
– The amount of the premium depends on the difference between your fixed interest rate and the variable interest rate, how much time you have left on the fixed rate agreement, and the size of the mortgage.
– Generally, you cannot use the grace period or pay off the loan faster than agreed. Different banks offer different conditions on fixed interest rates, so it is important to check carefully, Incedursun recommends.
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No speculation
Consequently, if interest rates rise, the bank is initially interested in lending at a higher interest rate. Then they pay you a discount at various banks, like at Nordea. But banks don’t want customers to speculate on a fixed-rate loan and a possible increase in interest rates to guarantee this gain in interest rate.
– I would recommend to those considering fixed interest rates to verify the flexibility of the agreement offered by the bank. Often there is less flexibility in a fixed rate agreement.
– If you have a greater need for flexibility in payment, a better alternative will be to choose a floating interest rate, says Incedursun.
The online newspaper recently wrote that it may be a good idea to tie the interest rate now, because interest rates are very likely to increase in the future. Finance expert Hallgeir Kvadsheim recommended a long fixed interest rate for those who want to lock in the interest rate for a few years.
Minimum five years
– You must tie the interest rate for a minimum of five years and preferably for ten years. Three years is a bit unpredictable, and some banks require startup fees when switching from a liquid loan to a fixed one. Part of the profit is consumed, Kvadsheim declared, among other things, just three weeks ago.
He also noted that you should be aware that interest rates on new fixed rate loans change quite frequently. Some banks change the interest rate every week, other banks several times a week, unlike loans with floating interest rates,
– New fixed-rate deals change as the market goes up, Kvadsheim said.
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