September 26, 2022

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Personal finance, banking and finance

Personal finance, banking and finance

This is the horror calculator that families don’t want to see. Wrote Internet newspaper In the middle of March. Together with Storebrand, we then prepared the projected incremental expenses going forward for an average family of two children with a total income of NOK 1.1 million. This is a typical income, according to Statistics Norway.

These expenditures included increasing the costs of large, fixed items such as interest, food, electricity (Southern Norway), and fuel. In addition, of course, there are other expenses that have been excluded.

In March, costs for the average family could have increased by about 65,000 NOK per year, given our assumptions. Previous calculations came before the Norges Bank raised its key interest rate to 0.75 per cent. On Thursday, the central bank believes in one Double the increase to 1.75 percent.

In the worst case, there could be three more rate hikes this year for a total of one percentage point. Banks will pass two of them on to customers before the New Year. Nordea Bank was the first bank to announce on Friday a rate hike, Increased interest rates from September 30 apply to older loans. So Storebrand updated the numbers from March after the interest rate collapse on Thursday.

75000 NOK

It shows that the average household can expect an increase of NOK 75,000 in expenditures at the end of 2022 from the four main expenditure items (see table below) compared to December 2021. This is a deterioration from March of NOK 10,000.

After the supposed 4 percent salary increase, we’re talking about NOK 45,000 in increased net expenses for our family (annual impact as of December).

The high interest rates are the most annoying thing. We may be facing the biggest rise in interest rates in many years, and that increase, admittedly, comes from very low levels.

– What surprised me most was that the Norges Bank said in March that the rate increases would come gradually. People must have time to adjust to higher interest rates. There have now been two strong interest rate increases, one after the other. It should be seen as a kick in the stomach, despite the increase announced earlier, consumer economist Cecily Twiettenstrand at Stourbrand tells Nettavisen.

So what’s new in our assumptions compared to March?

  • The interest on the 3 million loan is expected to rise from 2.05 percent in December 2021 to 4.15 percent in December 2022.
  • Food prices will rise by 10 percent this year, not 5 percent, as was expected in March.
  • Gasoline prices rose from NOK 16.50 per liter to NOK 22, not NOK 21.
  • Electricity consumption of 20 thousand kWh per year is more complex, but it takes into account the high electricity prices and the increase in electricity subsidies and therefore applies in the south. The account was prepared in March before the electricity subsidy.
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The most important thing for the Norges Bank is to bring down the very high inflation rate. Central Bank Governor Ida Walden Bach justifies sharp interest rate hikes by saying that if they eased now, inflation could lead to a significant increase. Then they risk having to tighten further at a later stage.

very demanding

Fears are growing among many, as we head toward a difficult economic adjustment. The announced rate hikes this fall will have different results, but for many it will be very difficult, says Twiettenstrand.

When you take out a mortgage, banks have to test your money to make sure you can afford an interest rate increase of up to five percentage points. In theory, borrowers should be able to afford a mortgage interest rate of about seven percent.

– We’re far from it. But the increased food prices mean 1,100-1,200 NOK per month in increased expenditures for families with young children. Tettenstrand believes that this is a combination of higher electricity prices and increased fuel costs that many have not prepared for.

High debt ratio

Who will struggle more in the future?

– It is those with the highest debt relative to their income who will feel this the most, as well as those who are already in financial difficulty, warns the consumer economist. It is unique to groups such as students, single parents and minimal pensioners.

– Hence I am particularly concerned about younger borrowers who have not seen high interest rates before, but only artificially low interest rates. The interest rate was at abnormally low levels. The Bank of Norway suggests a normal policy rate of between 1.75 and 2.25 percent. But unless there is a significant reduction in price inflation in the future, we must prepare for interest rates to continue to rise.

Norges Bank has not indicated what rate will be set in September, but most experts believe there will be another rate hike. New estimates coming in about a month.

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He must turn quickly

– Is there anything alarming after the signals from the Norges Bank on Thursday?

Interest rates must be rising so quickly that those with loans will have to convert much faster to adjust to their consumption. And then I worry about the development in credit card use over the summer, credit card debt has increased, Tvetenstrand answers.

She says 80 percent of those with a credit card pay everything immediately after using the card. But 20 percent only pay the minimum amount or take a long time to pay it off.

– I hope now the unsecured debt will not increase. There has been a decline during the pandemic, but I am a little concerned about how the development might be after the fall.

Increased interest rates, as the calculation shows, mean much more than other expense increases combined.

no doubt

– Yes, no doubt about it. The Survey of Living Conditions in Norway also shows that 900,000 Norwegians do not have the financial resources to cover unexpected expenses of NOK 19,000. This corresponds to one in five people over the age of 18. A recent survey by Danske Bank indicates that many have financial problems.

We’re talking about several tens of thousands a year in increased interest costs for those with large loans. The mortgage interest rate will be well above four percent within one year if Norges Bank is right in its rate forecast.

The announced interest rate increases are a stark reminder of the need to understand the consequences of getting a mortgage. For example, what does a 5 percent mortgage interest rate mean to me?

If you have the opportunity, you should set aside the extra costs in a temporary account for the expected expenses or pay an extra amount on the loan at the beginning, says the consumer economist.

Home rent hits one of the most indebted people in the world – you and me!

nothing for sale

But not everyone who struggles to get their finances out has a loan. In the increasingly expensive rental market, Oslo should start with 14000-17000 NOK per month for two- and three-bedroom apartments. These are expenses that you cannot deduct from your tax.

– Storebrand consumer economist warns that those who are renting and have nothing to sell may find it extra difficult to move forward.

And Waldenbach warned at a news conference in Arendal Thursday that many would find it more difficult. Nordea Norge CEO Snorre Storset told Nettavisen a month ago that Most people have to make some hard choices.

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Interest rates were abnormally low, and many people would have been in relatively good shape during the period with low interest rates. Now Tvetenstrand says it’s a matter of deciding what to cut without affecting too much everyday life.

Here’s the bright spot

Those with high mortgages should check out an online mortgage calculator to find out what the increased interest rates mean for their loans. One bright spot is that the vast majority of people in Norway have one annual loan: Total interest and premiums up to the same amount every month.

When interest rates are increased in an annual loan, part of the burden of the increased installments is transferred to the loan. If a family today has a four million mortgage to be repaid over 20 years, they must pay NOK 22,000 in interest and repayments at an average interest rate of 2.9 percent. The interest portion amounts to approx. To begin with, NOK 9700.

If the mortgage interest rate goes up to 3.4 percent, there will be another NOK 1,000 per month in interest and repayments, i.e. NOK 12,000 per year. It will not be 20,000 NOK. The interest burden rises to 11,400 NOK on the down payment. The tax deduction takes 22 percent of the incremental interest.

The effect of the premiums means that an increase in interest rates will not be as bad as one might fear. But if you don’t enter and change the debt interest on the tax card, you won’t notice the tax deduction until you receive your tax settlement for next year. Tvetenstrand says.

be conscious

What other advice would you like to give in the future?

To be a more conscious consumer. Get rid of what you can afford expensive credit cards and consumer loans. Review fixed expenses to see that you’re not paying more than you have to on things like interest, electricity, insurance, and a mobile phone. Disconnect streaming services and subscriptions that you don’t use.

Planning to buy food. And then I would like to remind you that the account statement does not lie. Look at the statement of account to determine where the money is going, says Tvetenstrand.