What is kurssikring, and why should you consider it?
Are you facing a home purchase or a loan restructuring? Then kurssikring (rate lock) is a term you should know. A kurssikring – also called a fastkursaftale (fixed-rate agreement) – protects your home loan against fluctuations in the bond price from the day you enter into the agreement with the bank until the loan is actually disbursed.
How does kurssikring work? When you take out a realkreditlån (mortgage credit loan), the loan is based on bonds traded on the financial market. The price of these bonds can fluctuate from day to day, which affects either your loan proceeds (for fixed-rate loans) or your interest rate (for adjustable-rate loans).
Rate lock on different loan types
With a fixed-rate loan, price changes affect the amount you're paid out (the loan proceeds). If the price falls, you'll receive a smaller amount, which could mean you suddenly lack the funds to pay the seller.
Example without a rate lock: You need to borrow 2,000,000 kr. for your home purchase. The bond price falls 2 percentage points in the period from the loan offer to the disbursement date. This means you lose 40,000 kr. of your loan proceeds – money you'll have to find elsewhere.
With an adjustable-rate loan, price changes don't affect the loan proceeds but instead affect the interest rate on the loan. A rate lock on an adjustable-rate loan therefore secures your interest rate up until the disbursement date.
When should you use a rate lock? There are situations where a rate lock is particularly relevant:
1. When buying a new home
When you buy a new home, there are often several months between signing the purchase agreement and taking possession. During this period, bond prices can change significantly, which can affect your financing.
2. When restructuring your loan
If you're restructuring your loan, a rate lock can ensure you get the expected proceeds to pay off your existing loan.
3. During periods of market turmoil
During turmoil in the financial markets, such as we saw during the coronavirus crisis and the energy crisis, bond prices can fluctuate sharply in a short time. Here, a rate lock gives you peace of mind against sudden market movements.
4. When you want predictability
If you prioritise security and predictability in your finances over the possibility of potential price gains, a rate lock is a good choice.
What does a rate lock cost? A rate lock isn't free, and it's important to be aware of the costs when assessing whether it's the right solution for you.
Costs of a rate lock:
- Kursfradrag (price deduction): typically 0.2–0.25 price points per month the rate needs to be locked
- Administration fee: typically between 500–1,000 kr.
It's important to note that:
- The kursfradrag (price deduction) means your new loan becomes slightly larger
- The costs are typically co-financed within the total loan
- Spread over the entire term of the loan, the costs have a limited impact on your monthly payment
Example of costs:
For a loan of 2,000,000 kr. with a 3-month rate lock:
- Kursfradrag (price deduction): 0.25 points per month × 3 months = 0.75 price points (15,000 kr.)
- Administration fee: 750 kr.
- Total costs: 15,750 kr.
Spread over a 30-year loan, this represents only a minor increase in your monthly payment, while in return you gain certainty for your loan proceeds.
Advantages and disadvantages of a rate lock Advantages: Security: you know your exact loan proceeds or interest rate in advance. Predictability: you avoid unpleasant surprises in your finances. Peace of mind: reassurance throughout the entire home-buying process. Protection: safeguard against sudden price drops and interest rate increases. Disadvantages: Costs: there's a fee and a price deduction associated with a rate lock. No price gains: you miss out on any positive price movements. Binding agreement: once the rate lock is entered into, you're bound by it.
When can you set up a rate lock? To be able to set up a rate lock, certain time constraints must be taken into account:
- The disbursement date must be at least 10 business days in the future
- A rate lock is typically not set up more than 6 months in advance
- The loan offer must not have expired
This means timing is important when considering a rate lock. Our financial advisors at Bomae can help you find the optimal time for your rate lock.
Bomae's recommendations on rate locks At Bomae, we have clear recommendations based on our experience with home financing:
We recommend a rate lock when:
- You're taking out a fixed-rate bond loan
- There's a longer time until you take possession of the home
- The markets are unstable
- You prioritise security and predictability
We recommend an individual assessment when:
- You're taking out an adjustable-rate loan
- Possession is very close
- You have a high risk tolerance
It's important to stress that the right solution always depends on your individual situation. Our financial advisors assess all the factors in your specific situation to give you the best possible advice.
A home purchase can be a rollercoaster of decisions and uncertainties. With a rate lock, you can remove one of the bumps along the way and ensure that your loan lands exactly where you expect it to. Our advisors are ready to give you financial advice so you can focus on looking forward to your new home.
Contact us today
Do you have questions about rate locks, or want to know more about how it fits your home loan? Contact us at Bomae – we're here to make it all a little easier for you!
