In recent months, various areas of life have experienced a significant rise in prices – heating, electricity, food, fuel are one of the main items that directly affect the wallets of the Latvian population.
While decisions are being made at the national level on how to purposefully support vulnerable groups, activities to curb inflation are also planned. However, rising consumer prices are not the only side effect of rising inflation. The effect of inflation on borrowers and monthly payments when repaying loans is explained Swedbank Evija Kropa, expert of the Institute of Finance.
According to the expert, inflation also affects the level of credit interest rates. The higher the inflation rate, the more likely it is that money lending rates will also rise. When interest rates are low, certain goods are cheaper and more affordable. For example, buying a home costs less if you have lower mortgage rates. Cheaper and easier-to-buy goods are driving higher demand, while higher demand is driving up the prices of goods and services. To prevent prices from rising too sharply, interest rates are being raised centrally, making borrowing less attractive and increasing the willingness to deposit. This in turn reduces pressure on consumption and further price increases.
“If a person has no credit obligations and is not planning to do so, can he be considered not to be affected by the increase in interest rates at all? If companies have to postpone or cancel their development altogether, it can affect, for example, the number of people they employ. and reduced inflation, “he explains Swedbank Evija Kropa, expert of the Institute of Finance.
The expert draws attention to the fact that we have been living in an era of extremely low interest rates for a long time, which, of course, cannot last forever. Even before the pandemic and the instability caused by the war, there was talk of a gradual increase in interest rates. Now that inflation is reaching new highs, the determination to raise interest rates in the coming months is projected, with the six-month EURIBOR to be at least 1.6% by the end of 2023. What does this mean for people who have, for example, a mortgage?
If the loan has a variable rate (in addition to the rate set by the bank, the interbank rate EURIBOR changes every 3, 6 or 12 months), an increase in the monthly payment must be taken into account. The larger the amount of the loan, the higher the monthly payment and, of course, the greater the fluctuations in monetary terms caused by rising interest rates. For example, if the mortgage loan is 50,000 euros for 25 years with a bank added rate of 2% + 3-month variable EURIBOR, the monthly payment is 212 euros. If the variable EURIBOR rate is forecast at 1.6% in 2023, the monthly payment on this loan will increase to 253 euros or 20%. On the other hand, if the loan amount is higher, for example, 110,000 euros, the monthly payment increases by 91 euros (from 466 to 557 euros).
“Of course, the rise in interest rates will affect each mortgage borrower individually, as it depends on the amount of the loan balance and the remaining repayment period. However, in a situation where the price level of 30, 40 or 90 euros is already increasing, It is not for nothing that in the process of borrowing it is important to assess your ability to cope with this payment even in a changing situation, when something is happening with income flows or interest rates. the fact that the borrower is aware of the potential risks and is also ready for scenarios B and C, “the possible changes in the loan repayment amounts are outlined Swedbank Expert of the Institute of Finance.
One possible course of action to protect oneself from changing circumstances would be to opt for a flat rate. In this case, however, be aware that it will be higher than the variable from the outset, as the money lender predicts potential rate changes. This certainly makes it easier to feel that the payment will remain unchanged for the period of the rate fixation, but does not guarantee a financial benefit. It depends on whether and how strongly the variable rates increase and whether paying a higher price has already paid off in the initial period.
The second option is to look for solutions when the monthly payment has increased and it is impossible to deal with it. You can then contact the lender and ask for an extension of the repayment period, keeping the monthly payment at the previous level. This could help to deal with payment difficulties, but in the long run means higher percentage payments over the life of the loan. Swedbank An expert from the Institute of Finance calls to remember: the longer the loan is paid, the more it is paid as a percentage.
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