Economie [Nettavisen]: On Thursday it became known that The Bank of Norway raised its key interest rate by 0.5 percentage point to 1.25 percentAnd for you, it means increased interest costs, for example, on your mortgage.
The amount of the actual mortgage rate increase can vary from bank to bank. It is not a given that banks will increase the corresponding increase in the interest rate, as both are affected by competition between banks and what banks have to pay to borrow money in the market, according to Cecily Twiettenstrand, consumer economist at Storebrand.
The Bank of Norway announced that the key interest rate in monetary policy will reach three per cent by next summer. The average mortgage rate, now around 2.2 percent, is expected to rise to 3.99 percent in June 2023 and 4.3 percent in December 2023, according to recent figures from the Norges Bank.
What is the prime rate and how does it affect you?
The key policy rate is the interest rate used by central banks, which is used by the Norwegian Central Bank, to influence the economy in line with monetary policy objectives. It is a tool for stabilizing inflation and developments in the Norwegian economy.
The main policy rate is the interest rate that banks receive on their deposits in the Bank of Norway up to a fixed amount – a share, and is determined eight times a year.
It mainly affects the interbank rates and the level of interest rate offered by banks on deposits and loans to their customers.
- If you have more loans than money in your account, you will have less to spend.
The exchange rate is affected. If Norges Bank raises the key rate while other central banks choose to keep key rates stable, it would be better for investors in the foreign exchange market to own the NOK. This can lead to a strengthening of the NOK, which in turn causes what you buy from abroad to become cheaper.
Source: Norges Bank and Store Norske Leksikon
Loan can be much more expensive
Tvetenstrand says banks must notify customers of a new interest rate six weeks before they set it up, meaning the mortgage rate doesn’t actually increase until August at the earliest. Friday was Nordea Bank is the first bank to announce that mortgage rates are on the rise From 5 August.
Your monthly expenses can increase by several thousand kroner when the mortgage interest rate increases. Tvetenstrand has provided examples of how much your monthly costs have increased compared to today.
The starting point is an annual loan of NOK 3.4 million:
- The mortgage rate is 2.2 percent, which is what it is today: 12,960 NOK per month
- The mortgage rate is 2.7 percent, as the new interest rate could be from August: 13,840 kroner per month
- The mortgage rate is 4.3 percent, which we can get in 2023: 16,876 crowns per month.
Examples show that in a year and a half you may have to pay close to 4,000 kroner per month, which you pay today.
There are five steps you can take to try to reduce your monthly expenses, if you find it difficult to make ends meet when interest rates go up:
1. Interest deduction can already be obtained
Perhaps not many of those who have taken out mortgages in recent years have experienced that the special 22 per cent Norwegian interest discount means much to the private economy. This discount was previously widely reported in the media and vigorously discussedbut in the zero interest period it almost ended up in limbo.
But when interest rates rise, the benefits of discounting interest will also increase exponentially. If you have a large loan, you will find that you can get thousands of additional crowns in taxes again this year. This is money that can significantly reduce the financial burden of high interest rates, and can save the mortgage budget for people with limited financial resources.
What you pay as interest on your loan, you get a tax deduction for it. With the increased interest costs you get now, the tax will be reduced by 22 percent on the extra amount you pay in interest, says Tvetenstrand.
You get a 22% tax deduction for the interest you pay. This means that 22 percent of the total amount of debt interest you pay on the amount on your tax card is the money you get from tax in the next year.
If you fear it will be difficult to deal with the increased costs, you can go in and change your tax card so that you can reduce the tax when your interest rate increases.
– How much does he really have to say?
– If your interest expense increases by NOK 1,000 per month, your actual expenses will be NOK 780, says Tvetenstrand.
On the other hand, if you can pay the increased interest costs each month now, it may also be worth changing your tax card. Then you can alternatively take 220 kroner for every thousand kroner you increase your expenses with, and put it into a savings account or fund to get the interest and return on the money.
– It is important to check
An important rule to remember is that whatever affects your personal finances will be able to affect your tax deduction, says Marta Johan Jingdal of Nettavisen Tax Administration.
She says it’s always important to check that your tax card is in line with your expected income and deductions for the year.
– This is a good opportunity to check the correctness of the basis of your tax card. Is the stipulated income in line with what you expect to earn in 2022, are there deductions that are no longer relevant, or are there other factors that make them relevant for making corrections? She says to Netavizen.
Note, however, that if you currently have a table deduction, and you change your tax card now in the middle of the year, you will receive a percentage deduction. Gjengedal points out that it has no significance in principle.
2. Change the payment period
Another step to reduce your costs is to try to change the repayment period of your loan.
– If you choose a repayment period of 25 years when you withdraw the loan, you can ask if it is possible to extend the repayment period to 30 years instead. Your loan will generally be more expensive, but it can be a good alternative if you’re young today and struggle with hefty expenses each month, says Tvetenstrand.
There is a lot of money to be saved by changing the repayment period. Tvetenstrand points to an example:
If your mortgage interest rate is three percent, and you have a loan of NOK 3.4 million, the difference in your monthly costs will look like this:
- Repayment period of 25 years: 16,100 NOK to pay the loan per month
- Repayment period of 30 years: 14,300 NOK to be paid on the loan per month.
This means that you can save 1,800 kroner per month.
Get a discount
Another option is to ask your bank for a grace period, which means that you only pay the interest on the loan and not the installments.
– If you see that she has become financially tight, then at worst you can ask for a grace period. I recommend doing this only for a short time if you don’t have a temporary account, because you can instead set aside money for a temporary storage, says Tvetenstrand.
Now that interest rates are so low, people don’t have the same need for reserves as they do now. If additional expenses arise, many have been able to cover those expenses with their salary, she says, adding:
– Now it could be harder.
How long you can have a grace period usually depends on your loan-to-value ratio, says the consumer economist. That is, how high the loan you got compared to the value of the house.
If you have a loan of less than 60 percent of the value of the house, you have more flexibility and choose for yourself. But it’s possible to apply for a period if needed, even if you have a higher loan, she says.
4. Negotiate interest rates
Just like anything else you pay for, like insurance, mobile phone subscriptions, and electricity, you can also try to lower your mortgage rate.
If you have paid off the loan, and the value of the house increases, it may increase your chances of getting a better interest rate. If you’re a trade union member, they might negotiate good interest rates, because they negotiate on behalf of many, says Tvetenstrand.
Can your loan-to-value ratio have anything to say?
– Yes, the banks can reward you when you pay off the loan and get more security at home. If you’re under 34, you’ll likely get the best mortgage interest rate in the bank, regardless of your loan-to-value ratio. She says this is because the bank wants to help young people enter the housing market.
– So it’s important to follow the interest rate you get, she points out.
However, some choose to go to other banks because they see that some of them may offer lower interest rates than the banks they have today.
Some banks may think strategically for a while, and may use the mortgage rate to connect with new customers. Over time, you’ll likely have a similar interest rate at most banks, but some may be raising rates earlier or raising them lower for some clients, she says.
Tvetenstrand also encourages you to consider other costs you may incur by changing banks, such as incorporation fees and registration fees.
5. Bake in other loans into the mortgage
If you have more than just real estate loans, such as a car loan, you can take out these loans if you are in a very difficult financial situation.
A mortgage is mostly the loan at the lowest interest rate. Tvetenstrand says that converting a car loan into a mortgage is a great opportunity to reduce costs, but increase the loan without increasing the value of the home.
The repayment period of a car loan can be up to ten years. The reason for its decline is that the car loses its value over the years rather than the average house. However, if you combine the car loan with the mortgage, you will increase the repayment period on the car, say, 25 years, if the repayment term is on your mortgage.
If you don’t pay extra on the mortgage when you complete the car loan, you will pay on the car for a longer period of time than the car you own. Alternatively, you can keep the car loan as a separate loan with a mortgage on the home so you can pay it off faster and at a lower interest rate, she says.
– But what happens if you sell your house after that, but have not yet paid off the car loan that it is part of?
– After that, the car loan charges up the capital in your home. This can make buying a new home more difficult. It can also make it more difficult to get more loans on the home, if you incur significant costs to fix roofs, for example, she says.
The difference can be several thousand per year
However, it is not only interest rates that are rising. Electricity prices are rising, fuel is becoming more expensive, and From July 1, food is also expected to become more expensive.
It makes the economy tight for many. Thomas Iversen, a consumer attorney at the Consumer Council, encourages you to take action on your electricity agreement if your total monthly costs become too high when the mortgage interest rate goes up.
– The spot rate obviously makes up the majority of the electricity bill, and at the same time it can be money to save when switching to a cheaper deal. The difference between the most expensive and the cheapest agreements may be several thousand kroner per year, he tells Netavizen, and notes strømpris.no to compare deals.
He also says it’s wise to check so you don’t pay for unnecessary additional services.
– It can be, for example, electricity insurance, price ceilings, green electricity. These hardly ever hit, says Iverson, settling on your already high electric bill.
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