When it's time to buy your dream home, there are many things to consider. One of them is, for example, which type of home loan to choose. Should it be a fixed-rate loan or a variable-rate loan?
Read more in this article.
There are advantages and disadvantages to both loan types. It can therefore be worthwhile to read up on the topic, so you are better equipped to make the best choice for your specific situation.
Remember that you should negotiate with the banks. Whether you choose a fixed-rate or variable-rate loan, there can be money to be saved by entering into negotiations with the bank.
Get help from Bomae – we are experts in loan advice and in negotiating with banks on behalf of home buyers.
Fixed-rate vs. variable-rate loan. Total housing costs consist of many different expenses, of which the loan payment (ydelse) is typically the largest. The payment is affected by the interest rate on the home loan, which is why it is important to consider which type of rate suits you best.
A question we often get from our clients when helping them along the way is whether they should go with a mortgage-credit loan (realkreditlån) with a fixed or variable rate. Neither solution is inherently better than the other.
But there are several things you should keep in mind when making your choice. There are also specific features of the loans that you should be aware of. In this article, we cover the basic characteristics of fixed vs. variable rates, and not the various loan types that exist within each.
Fixed rate. With a mortgage-credit loan where the interest rate is fixed for the entire term of the loan, you secure your payment as much as possible, which gives you the most secure form of financing.
A fixed-rate loan is generally taken out at a price (kurs) below 100.
For example, if the price of the loan you are taking out is 98, you receive 98 kr. for every 100 kr. you borrow.
When taking out the loan, you therefore want the price to be as close to 100 as possible, to minimise your price loss (kurstab). The price loss is added on top of your total loan. A lower price at the time of taking out the loan therefore increases your total loan amount (the principal).
On the other hand, a fixed-rate loan always gives you the option of repaying it at a maximum price of 100, plus any difference interest (differencerenter). This means you can never end up paying more than your outstanding debt on the loan, plus an amount corresponding to a maximum of six months' interest.
Difference interest (differencerenter) is a kind of “penalty interest” that you pay if you have not given notice on the loan in time and repay it at the settlement date.
Difference interest is tax-deductible.
A fixed-rate loan has four annual notice dates, meaning you can repay your loan at a price of 100 four times a year. This will typically be the case if the market interest rate has fallen since you took out your loan.
Broadly speaking, prices tend to rise when interest rates fall – and conversely, prices fall when interest rates rise. Because of this mechanism, you may find that the price when you repay the loan is lower than when you took it out. This means you would be able to repay your loan at a lower outstanding debt than what the loan is technically worth.
Do you have questions about fixed and variable interest rates?
Up- and down-conversion. A fixed-rate loan also gives you the option of active debt management, which is the collective term for up- and down-conversions. If you choose to convert your fixed-rate loan into a new fixed-rate loan with a lower interest rate than before, this is called a down-conversion (nedkonvertering).
In this scenario, you benefit from a lower interest rate on your loan, but your outstanding debt will be roughly the same, or higher, compared with keeping your current loan. As a result, you will often be able to achieve a lower payment than before.
If you go the other way and convert your fixed-rate loan into a new fixed-rate loan with a higher interest rate, you will typically be able to obtain a new loan with a lower outstanding debt than before, albeit at a higher interest rate.
This type of conversion is called an up-conversion (opkonvertering). Here, the payment will typically be close to the same level, or perhaps a little higher. In return, your total outstanding debt is now lower than before the up-conversion.
Variable rate
There are now several different types of variable-rate loans. What they all have in common is that you only know the interest rate for a shorter period at a time – typically 1-5 years at a time. A variable-rate loan where you lock the rate for 1-5 years at a time is called an F1-F5 loan.
Such a loan is, unlike the fixed-rate loan, always taken out at a price of 100. This means that with a variable-rate loan, your total loan amount (the principal) will often be lower than with a fixed-rate loan, since you avoid the price loss. On the other hand, you need to pay a little more attention to the redemption terms of a variable-rate loan.
Here, you can only repay the loans at a price of 100 at the interest-rate adjustment dates. So if you have chosen an F5 loan, you will only be able to repay the loan at a price of 100 in 5 years' time.
If you need to repay the loan earlier than that, it will typically happen at the market price, which will usually be above 100. This means that if you want to repay the loan after three years, you should expect to pay more than you owe.
The variable rate is typically lower than the fixed rate. On the other hand, the contribution rate (bidragssats) is often higher on variable-rate loans than on fixed-rate loans. So some of the savings from the lower variable rate are eaten up by a higher contribution rate. Even so, the variable-rate loan will often still have a lower payment right now than the fixed-rate loan.
We always recommend that you get independent buyer's advice, so all your options are mapped out and you get the solution that fits your exact situation.
Advantages and disadvantages of the two loan types. When considering taking out a mortgage-credit loan, it is important to decide whether you want a fixed or variable rate. There are advantages and disadvantages to both types of rate, so it is important to consider what best suits your financial situation.
Advantages and disadvantages of a fixed rate. One advantage of a fixed-rate loan is that it gives you a predictable financial situation. You know what you will pay each month, which can provide peace of mind.
At the same time, it can also be easier for you to plan your finances, as you do not need to worry about potential changes in interest rates.
One disadvantage of a fixed rate is that you may miss out on the chance to benefit from falling interest rates. Other advantages and disadvantages of a fixed-rate mortgage-credit loan include:
Advantages of a fixed rate
- The payment on your loan is fixed, which can give you greater financial predictability
- You can repay your loan at a price of 100, which can give you more flexible loan repayment
- You can protect yourself against interest rate increases, as the rate is fixed for the entire term of the loan
Disadvantages of a fixed rate
- You cannot benefit from falling interest rates, as you have committed to a fixed rate
- If you take out the loan at a low price, your loan amount will increase
- A fixed-rate loan is typically more expensive than a variable-rate loan, since you pay for the greater security that a fixed rate provides
Please note that these advantages and disadvantages are not exhaustive, and there may be other factors that affect your choice of loan.
Need to talk to a professional adviser about your options? Get the best and cheapest home loan with loan advice from Bomae.
Advantages and disadvantages of a variable rate. A variable-rate loan has the advantage that the interest rate can fall, giving you a lower payment. This can provide a financial benefit if rates fall. Conversely, if rates rise, a variable-rate loan becomes a disadvantage, as the rising rate will cause your payment to increase. This can create a more unpredictable financial situation and requires a certain degree of financial flexibility to manage. Other advantages and disadvantages of a variable-rate mortgage-credit loan include: Advantages. The opportunity to benefit from falling interest rates. If market rates fall, the rate on your loan will also fall, and your payment will be lower. This can result in lower total costs for you. No price loss. Since you do not pay a price loss when taking out a mortgage-credit loan with a variable rate, your total loan cost will be lower than with a fixed-rate loan. Better liquidity. If you suddenly need to pay off the loan, you can do so without having to pay a high penalty rate. This provides better liquidity and flexibility. Disadvantages. Because the interest rate can change, there is uncertainty about your future payment. If rates rise, your payment will also rise, and your total costs will increase. Harder to budget. Because of the uncertainty in the interest rate, it will be harder to budget and plan your financial obligations in the long term. Less predictability. Since the rate can change at short notice, you cannot be sure what your payment will be in a year or two. This can make it difficult to plan your finances long term. Again, note that these advantages and disadvantages are not exhaustive, and there may be other factors affecting your choice of loan. Need to talk to a professional adviser about your options? Get the best and cheapest home loan with loan advice from Bomae. It is important to take your financial situation into account, and whether you want a more predictable or a more flexible finances, when choosing between a fixed or variable rate. A professional property adviser can help you assess what suits your situation best, and which type of loan will give you the most favourable financial outcome.
What is an F-Kort loan? An F-Kort loan is a mortgage-credit loan where the interest rate is adjusted every 6 months, at the end of June and December each year.
What you get:
- A lower rate than on a fixed-rate loan
- Higher interest rate risk
- If rates fall, your payment becomes lower for the next 6 months
- If rates rise, your payment becomes higher for the next 6 months
- The option of interest-only payments (afdragsfrihed) for up to 10 years
Who offers F-Kort loans
You can find F-Kort loans at:
- Totalkredit – F-Kort
- Nykredit – F-Kort
- Nordea Kredit – Kort Rente
- Realkredit Danmark – Flexkort
- Jyske Kredit – Kort Rente (Note: here the rate is adjusted every 3 months instead.)
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