ECONOMY [Nettavisen]: On Thursday it became known that Norges Bank raises the key interest rate by 0.5 percentage points to 1.25 per centand for you it means increased interest costs on, for example, your mortgage.
How much the mortgage rate actually increases can vary from bank to bank. It is not a given that the banks increase the corresponding interest rate increase, as it is both affected by the competition between the banks and what the banks have to pay to borrow money in the market, according to Cecilie Tvetenstrand, consumer economist at Storebrand.
Norges Bank announced that the key policy rate will be up to three per cent by next summer. The average mortgage rate, which is now around 2.2 per cent, is expected to increase to 3.99 per cent in June 2023 and 4.3 in December 2023, according to recent figures from Norges Bank.
What is the key interest rate and how does it affect you?
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The key policy rate is an interest rate that central banks, which Norges Bank, uses to influence the economy in line with the objectives of monetary policy. It is a tool for stabilizing inflation and developments in the Norwegian economy.
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The key policy rate is the interest rate that the banks receive on their deposits in Norges Bank up to a fixed amount – a quota, and is set eight times a year.
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It primarily affects the interest rates between banks and the interest rate level the banks offer on deposits and loans to their customers.
- If you have more loans than money in your account, you will have less to spend.
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The exchange rate is affected. If Norges Bank raises the key interest rate while other central banks choose to keep their key interest rates stable, it will be more favorable for investors in the foreign exchange market to own Norwegian kroner. This can lead to the Norwegian krone strengthening, which in turn leads to what you buy from abroad becoming cheaper.
Source: Norges Bank and Store Norske Leksikon
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The loan can be so much more expensive
Tvetenstrand says that banks must notify customers of a new interest rate six weeks before it can be set up, so this means that the mortgage interest rate does not actually increase until August at the earliest. Friday was Nordea is the first bank to announce that mortgage rates are rising from 5 August.
Your monthly expenses can increase by several thousand kroner when the mortgage interest rate increases. Tvetenstrand has set up examples of how much your monthly costs can increase compared to today.
The starting point is an annuity loan of NOK 3.4 million:
- Mortgage rate of 2.2 percent, which is what it is today: NOK 12,960 a month
- Mortgage rate of 2.7 percent, as the new interest rate can be from August: 13,840 kroner a month
- Mortgage rate of 4.3 percent, which we can get in 2023: 16,876 kroner a month.
The examples thus show that you may have to pay almost 4,000 kroner more a month in a year and a half, than what 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 rise:
1. Can get interest deduction already
Many who have taken out mortgages in recent years have probably not experienced that the special Norwegian interest deduction of 22 per cent means much to the private economy. This deduction was previously widely reported in the media and fiercely debatedbut in the period of zero interest almost ended up in oblivion.
But when interest rates rise, the benefits of the interest deduction will also increase significantly. If you have a large loan, you will find that you can get thousands of kroner more in tax again this year. This is money that can significantly reduce the financial burden of rising interest rates, and can save the mortgage budget of people with tight finances.
– What you pay in interest on your loan, you get a tax deduction for. 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 tax deduction of 22 percent for interest you pay. This means that 22 percent of the total amount of debt interest you pay over the amount inside your tax card is money you get back on the tax next year.
If you fear it will be difficult to handle the increased costs, you can go in and change the tax card so that you can reduce the tax when your interest rate increases.
– How much does it really have to say?
– If your interest expenses increase by NOK 1,000 a month, your actual expenses will be NOK 780, says Tvetenstrand.
If, on the other hand, you can afford to pay the increased interest costs every month now, it may also be worthwhile to change the tax card. Then you can rather take 220 kroner per thousand kroner your expenses increase with, and put them in a savings account or fund to get interest and return on the money.
– Important to check
– An important rule to remember is that everything that affects your personal finances will be able to affect your tax deduction, says Marta Johanne Gjengedal in the Tax Administration to Nettavisen.
She says that it is always important to check that the tax card is in line with what is expected of income and deductions for the year.
– This is therefore a good opportunity to check that the basis for your tax card is correct. Is the income stipulated 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 it relevant to make corrections? she says to Nettavisen.
Note, however, that if you currently have a table deduction, and change the tax card now in the middle of the year, you will receive a percentage deduction. Gjengedal points out that in principle it has no significance.
2. Change repayment period
Another step to reduce your costs is to try to change the repayment period on your loan.
– If you chose a repayment period of 25 years when you took out the loan, you can ask if it is possible to extend your repayment period to 30 years instead. Your loan will be more expensive overall, but it can be a good alternative if you are young today and struggle with high expenses every month, says Tvetenstrand.
There is a lot of money to be saved by changing the repayment period. Tvetenstrand points out an example:
If your mortgage interest rate is three percent, and you have a loan of NOK 3.4 million, the difference in the monthly costs will look like this:
- 25-year repayment period: NOK 16,100 to pay on the loan per month
- 30-year repayment period: NOK 14,300 to be paid on the loan per month.
This means that you can save 1800 kroner a month.
Get a deduction
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 it becomes tight financially, you can in the worst case ask for a grace period. I recommend only doing this for a short period if you do not have a buffer account, because then you can rather set aside money for a buffer, says Tvetenstrand.
– Now that interest rates have been so low, people have not had the same need for a buffer as they want now. If extra expenses have arisen, many have been able to afford to cover them with their salary, she says, and adds:
– Now it can be tougher.
How long you can get a grace period usually depends on your loan-to-value ratio, the consumer economist states. That is, how high a loan you have compared to how much the home is worth.
– If you have a loan that is less than 60 percent of the value of the home, you have greater flexibility and choose for yourself. But it is possible to apply for a period if needed, even if you have a higher loan, she says.
4. Negotiate interest rates
Just like everything else you pay for, such as insurance, mobile subscriptions and electricity, you can also try to negotiate down the mortgage rate.
– If you have paid down the loan, and the home has increased in value, it can increase your chances of getting a better interest rate. If you are a member of a trade union, they may have negotiated good interest rates, since they negotiate on behalf of many, says Tvetenstrand.
– Can your loan-to-value ratio have anything to say?
– Yes, the banks can reward you as you repay the loan and have more security in the home. If you are under 34, you will probably get the bank’s best mortgage interest rate, regardless of the loan-to-value ratio. This is because the bank wants to help young people enter the housing market, she says.
– It is therefore important to follow the interest rate you get, she points out.
However, some choose to go to other banks because they see that some may offer lower interest rates than the bank they have today.
– Some banks may think strategically for a period of time, and may use the mortgage rate to connect with new customers. Over time, you will probably have a similar interest rate in most banks, but some may be earlier in raising interest rates or raising it less for some customers, she says.
Tvetenstrand also encourages you to look at other costs you may incur by changing banks, such as the establishment fee and registration fee.
5. Bake in other loans in the mortgage
If you have more than just mortgages, such as a car loan, you can collect these loans if you are in a very tight financial situation.
– The mortgage is mostly the loan with the lowest interest rate. Baking a car loan into the mortgage is a great opportunity to reduce costs, but you increase the loan without increasing the value of the home, says Tvetenstrand.
A car loan can have a repayment period of up to ten years. The reason it is lower is because the car loses value over the years as opposed to a normal home. If you bake the car loan into the mortgage, however, you will increase the repayment period on the car to, for example, 25 years, if it is the repayment period on your mortgage.
– If you do not pay down extra on the mortgage when the car loan is baked in, you will pay on the car longer than you have the car. Alternatively, you can keep the car loan as a separate loan with a mortgage on the home so you can pay it down faster with a lower interest rate, she says.
– But what happens if you sell your home then, but you still have not paid down the car loan that is part of it?
– The car loan has then eaten up the equity in your home. This can make it more difficult to buy a new home. It can also make it more difficult to take out more loans in the home, if you, for example, incur large costs for, for example, repairing roofs, she says.
– The difference can be many thousands a year
However, it is not just interest rates that are rising. Electricity prices are rising, fuel is becoming more expensive, and from 1 July, it is also expected that food will be even more expensive.
It makes the economy tight for many. Thomas Iversen, consumer lawyer at the Consumer Council, encourages you to take action on your electricity agreement if your total costs per month become too high when the interest rate on the mortgage increases.
– The spot price obviously makes up the majority of the electricity bill, at the same time it can be money to save on switching to a cheaper agreement. The difference between the most expensive and cheapest agreements can be many thousands of kroner a year, he says to Nettavisen, and refers to strømpris.no to compare deals.
He also says that it is wise to check so you do not pay for unnecessary additional services.
– It can be, for example, electricity insurance, price caps and green electricity. These almost never strike, and settle on top of an already high electricity bill, says Iversen.
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