Considering an upward conversion of your home loan? Upward loan conversion (opkonvertering) is active debt management — and there can be a lot of money to save. But there are both advantages and disadvantages to converting your loan upward, and there are also some things you should be aware of before doing so.
During 2022, interest rates rose sharply to curb rising inflation, which is why many people are currently choosing to convert their home loans upward. But there are a number of risks involved in restructuring the loan, since you only gain once rates fall again.
We always recommend that you get independent loan advice, so that all your options are clarified and you get the solution that fits your exact situation.
In this buyer's guide, you can read about:
- What does an upward loan conversion mean?
- When is the best time to convert upward?
- Other things to be aware of when converting
What does an upward loan conversion mean? With an upward conversion of your loan, you exchange your fixed-rate mortgage loan (realkreditlån) for a fixed-rate loan with a higher interest rate than the one you currently have. When you redeem the loan, it means you buy bonds at market price. To finance this new bond purchase, you'll need to take out a new loan.
In that case, you can reduce the remaining debt on the loan — meaning you'll be able to redeem the loan for less money than you owe. For example, if you convert a fixed-rate loan from 1% to 5%, you can cut 238,000 kr. off the remaining debt per million kr.
Keep in mind that when you exchange the loan for one with a higher interest rate, your mortgage payments will increase and you'll have a higher monthly installment. This also means you need to calculate at what point your proceeds will be eaten up by the higher interest rate.
There are several ways you can restructure your loan. You can also do a downward conversion of the loan, which means restructuring to a lower interest rate. In some cases you can also do a cross conversion, where you switch from a variable rate to a fixed rate (or vice versa).
When is the best time to convert upward? As a rule of thumb, it usually pays off best to restructure the mortgage loan if the market interest rate (the coupon rate) moves up by 1-1.5 percentage points. In most cases, it pays off best to convert the loan upward if it's a mortgage loan of 1 million kr. or more.
You should also only consider converting the loan to a higher rate if you expect interest rates to fall again later. If the loan sits too long at a high rate, you risk losing money on the conversion. Here you also need to consider when the extra amount you end up paying each month exceeds the real amount you can cut from your remaining debt.
So there's an element of speculation in the process, and there are many factors that determine whether it's advantageous for your particular situation to restructure the loan. That's why you should consult an advisor who can give you knowledgeable and independent advice.
Get advice on upward loan conversion from Bomae
Other things to be aware of when converting. There are also other things you should be aware of before restructuring the loan — because the restructuring also opens up further options for changes to the loan. This could include: the term of the loan — is it what you want?
- Can you tell if the interest-only period is about to expire?
- Do you want the loan with a fixed or variable rate?
- Do you want to borrow more money for, say, home improvements (new windows, a new kitchen)?
Another option is to lock in the exchange rate (kurssikring) on your loan before taking it out. At Bomae we always recommend that you lock in the rate if you're taking out a fixed-rate bond loan. This is because the rate can fluctuate significantly, and in a purchase situation you don't want to risk ending up with less proceeds than you need to pay the remaining purchase price. Read much more about rate locking on loans here.
Remember that you won't necessarily get the best and cheapest home loan at the bank. Here you can get more good advice on how to get the best home loan at the bank.
Fill out the contact form so we can talk about how we can help you buy and finance your home.
