interest and debt | Shocking number: The interest rate is nearly as bad as it was in the 1980s

(The newspaper online): The Bank of Norway raised the interest rate a full 11 times from the bottom less than two years ago, and is expected to raise the interest rate twice more.

In this case, that means a mortgage interest rate of about 6 percent for many. Some economists think it will rise further.

But many Nettavisen readers are keen to point out this: In the 1980s, interest rates were much higher. For a period it was more than 16 percent.

Thus, the interest rate today is nothing. right?

Reality with major modifications

On the other hand, comparing today’s interest rate level to the peak of the 1980s is very misleading.

• The tax system was at that time very Profitable for those who have a lot of loans
• Norwegians have much more debt than before.

So Nettavisen asked several economists how high the interest rate could be today, before it was actually as high as it was in the 1980s.

According to investment manager Robert Ness at Nordea, it is already the case that – under certain circumstances – people today pay as much as or more than the 80s.

The state took most of the interest bill

The really big difference from the 1980s is the tax system.

Previously, Norway had a very high marginal tax rate, but at the same time it came everyone The cost of interest as a deduction in the tax base. The more you earn, the more you earn from getting a lot of loans.

• Today, everyone, regardless of income, can take a deduction 22 percent of interest costs on tax. (The NOK 100 benefit gives you 22 kronor less tax.)

• In the 1980s it was possible to discount at the top 74 percent Of interest to the tax under optimal conditions, but in fact somewhat less. High deductions for interest also ensured that you quickly moved up the “tax ladder”.

– If you have a well-paying job with an income of NOK 200,000, you can borrow a million at 14 percent interest, and then you will pay almost zero tax, says Robert Ness.

– It may not have been everyone who received the full interest deduction. But the median wage was 86,320 in 1980, so most people had to pay a marginal tax of at least 60 percent. He noted that most people end up avoiding higher marginal taxes precisely because of the generous interest deductions.

It might come out worse today than then

Since the tax deduction varies with income, no conclusion can be found on how high the interest rate was today before it was as bad as it was in the 1980s.

At the same time, Nordea’s Næss points to another impact of the high interest discount, which has hit newly established companies with .

– Because the interest rate was so high, I paid a lot of interest and few installments for the first few years. So if we look at the first year, the distribution of interest and the premiums, people actually spend more today than they did back then, says Robert Ness.

This infographic provides an illustration of how the tax system affects the first year of an annuity.

Huge differences

Harald Magnus Andreessen, chief economist at Sparebank 1 Markets, notes that the marginal tax was reduced when the normal mortgage interest rate exceeded 16 percent. Thus, the help was not greater when the need was greater.

When interest rates peaked in 1987, “Normal” salary is NOK 161,140which gave a marginal tax on 41-53% according to social status.

• If you have a high income, you can deduct 67.4% – which gives one Effective interest rate 5.48%
• With lower incomes, you can deduct 36.4% – which gives one The effective interest rate is 10.7%.

NB! The deciding factor for the tax-exempt value is not what rate of tax you actually pay, but which rate one will pay If one does not get an increased interest expense.

after the last interest rate hike DNB operates at an interest rate of 5.65 percent in Norway. Discounting interest today, it gives an effective interest rate of 4.4 percent. On the other hand, it is expected to rise further after the fall, thus approaching the “best case” of the 80s.

At the same time, it is still much lower than those who came out worse than the old tax system.

Lots and lots of debt

The difference from the 1980s doesn’t stop at the tax difference: today’s Norwegians have much more debt.

The problem now is that the combination of the debt ratio and interest rates means that the interest burden is very high. That is why the interest rate is not so high either. If we didn’t have so much debt, interest rates would of course be much higher. There’s no doubt about it, says Harald Magnus Andreassen at Sparebank 1 Markets.

According to a recent Finanstilsynet report, the proportion of alleged debt in Norway has increased from around 150 to 250 percent since the end of the 1980s. In practice, this means:

• In 1990, the Norwegians were in 50 percent more debt than income
• In 2023, the average has increased to 150% more debt than income

And many of them have more than average: according to Finanstilsynet, the proportion of households with a high level of debt has quadrupled since the beginning of the 1990s.

This has worked well so far because interest rates have come down, while debt has increased. But now the interest rate is increasing, while the debt is high.

It could soon be worse than when the interest rate was 14 percent

Finanstilsynet believes that high debt, along with rising residential and commercial real estate prices, are the biggest vulnerabilities to Norway’s financial stability.

Statistics from the Norwegian Financial Supervisory Authority only go back to 1990, when the mortgage interest rate was still around 14 percent. Then the so-called“About 15 percent. This means that, on average, Norwegians spend about 15 percent of their income on interest.

This number dropped dramatically when interest rates fell throughout the 1990s. During the financial crisis, it rose again to 12 percent, before dropping to 5 percent at the end of the pandemic.

Now, however, he is on his way straight. Before the new year, it was already over 9 percent, and that was before large portions of the rate hikes took effect.

In a stress test, Finanstilsynet is now suggesting that the interest burden should rise to 15 percent in 2023, and 16 percent in 2024.

For those with a significant amount of debt, this can mean an interest burden of up to 35 percent.