“Here’s the horror calculator that families don’t want to see”, wrote Nettavisen in mid-March. Together with Storebrand, we have therefore established an increase in expected expenses for an average family with two children who have a total income of NOK 1.1 million. This is typical income, according to Statistics Norway.
These expenses included higher costs for large stationary items such as interest, food, electricity (Southern Norway) and fuel. Besides, of course, there are other expenses, which have been kept out.
In March, an average family would have increased costs by around NOK 65,000 per year, given our assumptions. The previous calculation came just before Norges Bank raised the benchmark interest rate to 0.75%. The central bank believes it on Thursday double increase to 1.75 per cent.
In the worst case, there could be three more interest rate hikes this year totaling 1 percentage point. Banks will pass two to customers before the new year. Nordea was the first bank to announce on Friday to raise the interest rate, the increased rates apply from 30 September for old loans. Storebrand then updated the March data after Thursday’s interest rate slump.
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75,000 NOK
They show that the average household can expect NOK 75,000 spending increases at the end of 2022 from the four main spending items (see table below) compared to December 2021. This is a deterioration of NOK 10,000 compared to March.
After an alleged 4% salary increase, we are talking about almost NOK 45,000 in increase in net expenses for our family (annual effect starting in December).
It is the rise in interest rates that sting the most. We could face the strongest rise in interest rates in many years, an increase which, admittedly, comes from very low levels.
– The thing that surprises me the most is that Norges Bank said in March that interest rate hikes would happen gradually. People should have time to adjust to higher interest rates. There have now been two sharp increases in interest rates one after the other. It must be experienced as a kick in the stomach, even though this increase was announced ahead of time, says consumer economist Cecilie Tvetenstrand of Storebrand in Nettavisen.
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So what’s new in our assumptions compared to March?
- Interest on the $ 3 million loan is expected to increase from 2.05 percent in December 2021 to 4.15 percent in December 2022.
- Food prices will rise by ten percent this year and not by five percent as expected in March.
- Gasoline prices rise from NOK 16.50 per liter to NOK 22 and not NOK 21.
- Electricity consumption of 20,000 kWh per year is more complicated, but takes into account the higher electricity prices and the increased subsidy for electricity and therefore applies to the south. The March calculation was set before the electricity subsidy.
The most important thing for Norges Bank is to reduce the very high inflation rate. Central bank governor Ida Wolden Bache justifies the steep interest rate hikes by saying that if they hold back now, inflation could bite. So they risk having to tighten even more at a later stage.
Very challenging
– Concerns are increasing among many, we are heading towards a difficult economic transition. The interest rate hikes announced this fall will have different outcomes, but for many it will be very challenging, says Tvetenstrand
When you take out a mortgage, banks need to stress-test your finances to ensure you can withstand an interest rate hike of up to five percentage points. In theory, borrowers should therefore be able to sustain a mortgage interest rate of around seven percent.
– We’re a long way from that. But rising food prices mean NOK 1,100-1,200 per month in higher expenses for families with young children. It’s the combination of higher electricity prices and higher fuel costs that many haven’t prepared for, believes Tvetenstrand.
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High debt ratio
– Who will fight more going forward?
– It is those who have the highest debt in relation to their income who will feel it the most, as well as those who are financially distressed than before, warns the consumer economist. He identifies groups such as students, single parents and minimal retirees.
– And then I’m particularly concerned about younger borrowers who have never experienced an interest rate hike before, only artificially low interest rates. The interest rate was at abnormally low levels. Norges Bank suggests a normal reference rate of 1.75-2.25%. But unless there is a steep drop in price inflation going forward, we need to prepare for interest rates to continue to rise.
Norges Bank has not indicated what the interest rate will be set at in September, but most experts believe in another double increase in interest rates. In June, Norges Bank predicted a key interest rate of 3-3.25% during the first half of 2023.New estimates coming in about a month.
He has to turn around quickly
– Is there anything alarming after Thursday’s Norges Bank signals?
– It must be that interest rates rise so quickly that borrowers have to go back much faster to adjust their consumption. And then I’m worried about the development of credit card use over the summer, credit card debt has increased, Tvetenstrand replies.
It says 80 percent of those with a credit card pay for everything immediately after using the card. But 20 percent only pay the minimum amount or take a long time to pay for it.
– Now I hope the unsecured debt doesn’t increase. There has been a decline during the period of the pandemic, but I am a little concerned about what development beyond autumn might look like.
The rise in interest rates means, as the calculation shows, far more than the other spending increases combined.
No doubt
– Yes, there is no doubt about that. Statistics Norway’s Living Conditions Survey also shows that 900,000 Norwegians do not have the finances to cover an unexpected expenditure of NOK 19,000. This corresponds to one in five people over the age of 18. A recent Danske Bank poll suggests that just as many are struggling with their finances.
We are talking about several tens of thousands a year of rising interest costs for those with large loans. The mortgage interest rate will be well above four percent in a year’s time if Norges Bank is right in its interest rate predictions.
– The announced interest rate hikes are a very clear reminder that you need to understand the consequences when taking out 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 additional costs in a buffer account for upfront expenses or pay extra on the loan at the beginning, says the consumer economist.
Nothing to sell
But not everyone who is struggling to make their finances work has a loan. In the increasingly expensive rental market, Oslo must start with 1NOK 4,000-17,000 per month for two-room and three-room apartments. These are expenses that you cannot deduct from your tax.
– Those who rent and have nothing to sell may find it more difficult in the future, warns Storebrand’s consumer economist.
Wolden Bache warned at a press conference in Arendal on Thursday that many will find it more difficult. Snorre Storset, CEO of Nordea Norge, told Nettavisen a month ago Most people have to make some tough choices.
Interest rates were abnormally low and many people should have been relatively well off during the low interest rate period. Now it’s about mapping what to cut without affecting everyday life so much, says Tvetenstrand.
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Here is the bright spot
Those with high home loans should check an online mortgage calculator to see what interest rate increases mean for their loans. A positive point is that the vast majority of people in Norway have one lifetime loan: The sum of the interest and the installments amounts to the same amount every month.
When interest rates are raised on an annuity loan, part of the burden of the increased installments is transferred further into the loan. If the family today has a four million mortgage to repay in 20 years, they have to pay NOK 22,000 in interest and repayments at an average interest rate of 2.9%. The interest part amounts to approx. To begin with, NOK 9,700.
If the mortgage interest rate rises to 3.4%, there will be NOK 1,000 more per month in interest and repayments, NOK 12,000 per year. It will NOT be NOK 20,000. The interest burden rises to a meager NOK 11,400 on the first payment. The tax deduction takes 22 percent of the interest increase.
– The annuity effect means that interest rate hikes will not be as severe as one might fear. But if you don’t enter and change the interest payable in the tax card, you won’t notice the tax deduction until you receive the tax settlement for the next year. says Tvetenstrand.
Be aware
– What other advice would you like to give for the future?
– To be a more aware consumer. Get rid of what you can with credit cards and expensive consumer loans. Go through the fixed expenses to see that you are not overpaying on things like interest, electricity, insurance, and mobile. Cut out streaming services and subscriptions you don’t use.
– Plan food purchases. And then I would like to remind you that the statement does not lie. Look at the statement to map where the money goes, says Tvetenstrand.
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