When buying your dream home, there are many things to consider. One of them is, for example, how the economy is going to look and what type of house mortgage you should choose. But what does it even mean to get a mortgage on your house?
A house mortgage is a loan that you take out to purchase a new house. You can choose between many different types of loan. For example, you need to decide, whether you want a loan with a fixed interest rate or a variable interest rate. Read more in this article.
Fixed or variable interest on your house mortgage?
Your total housing costs consist of many different expenses where the loan repayment is usually the biggest. The loan repayment is affected by the mortgage rate, and therefore, it is important to consider what type of interest rate fits you best.
As a buyer’s agent, we help people buy a new home, and we often meet clients who ask if they should choose a mortgage loan with a fixed interest or a variable interest. You cannot say that one of the solutions is better than the other. However, there are several things to consider when making your choice. Also, the different loans have different qualities that are worth considering.
In this article, we will go through the basic characteristics of a fixed vs. variable interest but not the different type of loans.
Fixed interest on a house mortgage
If you choose a mortgage loan with a fixed interest during the entire loan period, you secure your payment as much as possible – giving you the most secure financing. Usually, a fixed loan is taken out at a price under 100.
An example of this is if the price for your loan is 98, so you get 98 kr. for each 100 kr. you loan.
The loan period
Price: 98
Payment: 98 kr. for each 100 kr. you loan)
When you take out a loan, you want the price to be as close to 100 as possible to minimize your exchange loss. Your exchange loss is added to your total loan. Therefore, a lower price when taking out the loan will increase your total loan amount (the principal).
On the other hand, a fixed interest gives you the opportunity to always pay it back at a maximum price of 100, plus potential differential rates. Therefore, you will never have to pay more than your outstanding debt plus the amount that corresponds to max 6 months interest rates.
Differential rates are “penalty rates” that you must pay if you do not terminate your loan in time and pay it back before the deadline. Differential rates are tax-deductible.
(Typical deadlines for terminating a loan with a fixed interest
31 January, 30 April, 31 July, 31 October)
A loan with a fixed interest has four annual termination deadlines, and therefore, four times a year you can pay back your loan at a price of 100. Often, this is the case if the market rate has decreased since you took out the loan. Roughly speaking, we often see that the prices increase when the interest rate decreases – and conversely, the price decreases when the interest rate increases.
Due to the above mechanism, you can also experience that the price is lower when you want to pay back the loan than when you took out the loan. Therefore, you will be able to pay back your loan at a lower outstanding debt than what the loan actually indicates.
A loan with a fixed interest gives you the opportunity to actively take care of your loan. If you choose to reorganize your fixed loan to a new loan with a fixed interest and with a lower interest rate than the previous one, this is called down conversion.
Refinancing lower: Reorganizing a loan to a lower interest rate.
Outstanding debt: unchanged or bigger.
Refinancing higher: Reorganizing a loan to a higher interest rate.
Outstanding debt: often lower.)
In this scenario you will benefit from getting a lower interest rate on your loan, but your outstanding debt will almost be the same or bigger compared to a situation where you had kept your current loan.
If you go the other way around and change your current loan with a fixed interest to a new loan that also has a fixed interest but a higher interest rate, you will often be able to get a new loan with a lower outstanding debt than the previous – but at a higher interest rate. This type of refinancing is called up conversion.
Here, the payment will often be close to the same level or maybe slightly higher. However, your total outstanding debt will be lower than before the up conversion.
Variable interest on a house mortgage
Today, several types of loan with a variable interest exist. Similar to them all is that you only know the interest rate for a small period at a time – typically 1-5 years at a time. A loan with a variable interest where you lock the rate for 1-5 years at a time is called a F1-F5 loan.
Unlike a loan with a fixed interest rate, a loan like this is always taken out at a price of 100. This means that if you have a loan with a variable interest rate, your total loan amount (the principal) will often be lower than in the case of a loan with a fixed interest rate, because you avoid the exchange loss. On the other hand, you should be a bit more aware of the repayment terms on a loan with a variable interest rate.
Here you can pay back the loans at a price of 100 at the time of the mortgage rate adjustment. So, if you have chosen a F5 loan, you will not be able to pay back the loan at a price of 100 until after 5 years.
If you need to pay back the loan before the deadline, it will typically happen at the market price, and this will often be under 100. This means that if you after three years want to pay back the loan, you can expect to pay more than what you owe.
The variable interest rate is often lower than the fixed interest rate. On the other hand, the contribution rate will often be higher on loans with a variable interest rate than on loans with a fixed interest rate. So, some of the savings on the lower interest rate is reduced due to a higher contribution rate. However, the loan with a variable interest rate will often still have a lower price at the moment than the loan with a fixed interest rate.
Basically, you can consider the following when you have to choose between a loan with a fixed or variable interest:
Do you have a signed sales contract? Do you want counseling on what loan to choose?
Do you sleep safe at night and are you comfortable with fluctuation in your budget? Do you expect the interest rate to increase?
What does it mean for you? Choose a variable interest rate vs. Choose a fixed interest rate
Do you want counseling?
If you had received the right counseling before you signed the sales contract, you would not have ended here.
Call us on 70 40 03 94 and we will have a talk about your opportunities.
We always recommend you to contact a buyer’s agent to clarify all your options and get the solutions that fits your specific situation.
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Mortgage refinancing