“Interest rates remain low for several years,” we often hear, and this may be appropriate. We just don’t know.
However, if interest rates remain low for several years, it may be tempting to choose a variable rate loan instead of a fixed rate.
Today, for example, a home buyer can choose between a fixed-rate loan at 0.5% interest rate at the rate of 97.7 or a so-called E-Money which is adjusted for interest every 6 months. The interest rate is -0.43% and the rate is 100.
If you borrow USD 1,000,000 with an E-Money loan
You can alternatively borrow USD 1,023,541 if you choose the loan with a fixed interest rate.
But saving is not just the difference in interest rates. For there is also a difference in the contribution rate.
If the loan is 80%, you pay 0.8564% in contributions on the E-Money loan and 0.6812% on the loan with a fixed interest rate if the loan is taken up in Realkredit Danmark.
You therefore pay 0.1752% more in contributions on the E-Money loan, but there is no doubt that you will receive a total interest and contribution savings.
However, the savings are reduced by the tax benefit because you get a smaller tax deduction if you choose E-Money loan, but you still have a savings with the E-Money loan after tax.
If you focus on net performance, the difference becomes even smaller
This is because if the interest rate is lower, the repayment on a loan is greater at the beginning.
But in this regard, it must be remembered that repayment is not an expense, but a saving / reduction of debt.
One can therefore conclude that an E-Money loan in almost all areas is currently better than a fixed rate loan at 0.5%.
The exchange rate is better, the interest rate is lower, the net benefit is lower, the savings are larger.
Only measured on the contribution rate is F-Kort inferior to fixed interest rates.
But why not all homeowners choose just an E-Money loan?
It is obviously because the interest rate is variable. The homeowner only knows the interest rate for 6 months at a time, and although the economists agree that the interest rate will remain low for several years, it is therefore not certain that they will be right. The same economists have mistaken interest rate forecasts all the way down from 2% to now 0.5% when we talk about the fixed rate loans.
There are plenty of explanations for it, but after all, economists have been wrong.
And what WHEN interest rates rise? Not IF , because interest rates rise again. It’s just a matter of when.
We can try to do that in a couple of scenarios. Let’s say a property is bought for
NOK 4 million, which is borrowed with 80% mortgage loans.
This means that you save up to USD 1,033 more each month, and the starting debt is even USD 75,000 lower.
And at the same time you have more than USD 448 available each month. For example, you can save up.
But what if the economists are wrong and interest rates are already rising in a year.
Eg. by 1%. Then 2 things happen. Performance on the E-Money rises and the installment decreases.
No actually 3 things happen. The 0.5% loan rate falls, so the value of the debt is now lower.