Mortgage loans

Fixed-rate loans, the classic mortgage loans

Fixed-rate loans are the classic mortgage loans. Here the housing purchase is financed with bonds with a maturity of 20 or 30 years. During the entire term of the loan, a fixed monthly contribution will be paid on the loan. It has the advantage that you always know the size of your interest rates and that the benefit on the loan is not affected by interest rate developments in the market, as with variable-rate loans and interest-rate flexible loans.

Fixed-rate bond loans are for you who would like to know your housing expenses throughout the term of the loan. It gives a sense of calm to your finances and ensures you get vulnerable if the interest rate development in the market suddenly rises explosively.

Fixed-rate loans typically have a maturity of 20 or 30 years. The biggest difference is the maturity and amount of money you end up paying in interest over the maturity of your loan. The longer the maturity, the more interest you will pay. Then you have the necessary air in the economy for the slightly higher monthly contributions, you can save a lot of money on your loan by choosing the 20-year-old over the 30-year bond loan.

You can redeem a fixed-rate loan

You have the option of converting a fixed-rate loan if it is a convertible mortgage. Virtually all mortgage loans that are admitted today are convertible mortgages. The alternative is an indivisible mortgage, which can only be redeemed by paying the current rate. If the price has risen, it may, therefore, be an expensive business to repay the loan before time. Precisely for this reason, there are only very few mortgages that are inconvertible. In principle, the non-convertible loans are a little cheaper to absorb than the convertible (higher rate and lower interest rate), but the disadvantage of these loans is greater than the small interest rate.

With a convertible mortgage, you can always repay the loan at rate 100 on certain cutting dates, which are often once a year. If the rate is less than 100 on the loan, you can apply for the current course. It is therefore always easy to get out of a convertible mortgage, for example. if you have the money to pay the loan or if you want to restructure the loan.

Reorganizing its loan means redeeming its old loan and then recording a new loan. If interest rates have fallen sharply, it may be an advantage to switch to the lower interest rate. However, if the interest rate has risen significantly, it may also be an advantage to switch to a higher interest rate loan. It may seem strange that it may be an advantage to switch to higher interest rates, but sometimes it may pay off. If the interest rate has risen significantly, then the rate on your existing low-interest loan will also be reduced. This means that you can repay the loan for a much lower amount than you initially borrowed. Did you borrow for example? 1 million to price 100, and the price has subsequently dropped to 70, so you can pay off the loan by just paying 700,000 KR. You have thus cut 300,000 KR. Of your debt. You must now finance a loan of DKK 700,000, with a higher interest rate. The higher interest rate makes your loan of $ 700,000 initially be as expensive, or often even more expensive than your previous loan of 1 million. Therefore, at first glance, there is no benefit in doing this. However, there are several things that can still be beneficial:

  • If the interest rate again falls sharply, you can convert back to the low-interest rate and continue to benefit from the lower loan
  • If you plan to sell your property in the near future, you will immediately ensure that you can repay the loan cheaply. If you had not converted to the higher interest rate and the interest rate again had fallen at the time of sale of your property, you would still have loans for 1 million. If you had converted to the higher interest rate on time, your loan would only be 700,000. If the interest rate had not changed then you would be able to repay the loan for 700,000, no matter what solution you had chosen.
  • If the higher interest rate solution is only marginally more expensive than your old low-interest loan, then you can earn a saving by converting to the high-interest loan. This is because interest payments can be deducted from tax. Repayments cannot be deducted from tax and therefore it may be advantageous that as much as possible of your borrowing costs are interest.

If your interest rate has changed significantly in terms of your current loan, then it’s always a good idea to investigate whether you have the advantage of converting the loan into a new loan at the current interest rate. Note, however, that we have made a significant change in interest rates throughout. If interest rates have only changed by half a percent or so, then it is seldom a good idea to change the loan. This is because there are some costs of reallocating loans. The mortgage institute takes some fees for their work, which costs money. In addition, mortgage banks choose to make price cuts. This means that you pay a slightly higher rate than the indicative rate to settle your old loan. Likewise, you get a slightly lower rate for the new loan you raise. Overall, this means that you need to make as few repayments as possible, but that is definitely an advantage when the interest rate has changed significantly.

When you need to restructure your loans exactly, there is no secure recipe. It depends on how the market develops. Do you have for example a 7% percent loan, and convert this into a 5% loan, then you have saved money. If interest rates now fall to 3% and you revert, you have saved money again. However, if you had ice cream in your stomach and waited for the conversion and converted directly from 7% to 3%, you would have saved even more. Conversely, you had expected interest rates to fall to 3%, and this never happens, so you missed the conversion to the 5% because you waited for an even lower interest rate that never occurred. Therefore, you need to evaluate when you should convert your loan and how long you dare to wait. But do not convert every year as it will be expensive in fees, and prove that you can never guess at the very right time.

The fixed-rate loan is the safest choice

When the long-term interest rate rises in the market, the prices fall on the bonds that are in circulation. This helps to ensure a certain level of protection of the benefits in the house. However, it may go wrong anyway, witnessing the recent financial crisis. Many ended up being technically insolvent.

However, it was rare for people who had a fixed-rate loan with repayments, unless the loan was very new. Instead, it has been hard for those who had opted for an interest-rate flexible loan without repayment or a mortgage loan without repayment. Here, the residual debt has been constant, while the property valuations are downturned.

So the fixed-rate loan is the safest choice. On the other hand, you will pay higher interest and fixed contributions on the loan throughout its maturity. It can be bad during periods when the short-term interest rate is much lower than you give for your fixed-rate loan or when the economy is tight.

However, in times of frequent and violent interest rate rises, people with fixed-rate loans can sleep more fun at night. It is usually what causes people to choose them for riskier interest-rate loans.