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Fixed or floating interest rates? The common question we are trying to answer.

Taking a mortgage is something you should not do without first thinking through everything carefully as it is about large sums. One of the aspects that you should consider is how you want to do with the interest rate. You have two different main options to choose from and it is fixed interest rate and variable interest rate . What you choose is up to yourself as both types have advantages and disadvantages. Which of these we shall try to find out here.

Fixed interest rate

Fixed interest rate

In short, fixed interest rates mean that you unlock the interest rate level for a specific period of time. The interest rate can be fixed for 1 – 10 years and during this period your interest rate will not change regardless of the interest rates otherwise changed. This applies both if interest rates go up or down. The most common thing is that the interest rate on the various fixed interest rates is higher than that for variable interest rates.

The big advantage of fixed / fixed interest rates is that you always know exactly how much money you need to have available each month to handle your payments, because you have a fixed interest cost. This allows you to feel confident about the economic development during this period. This is especially good for those who do not have such large margins in your finances, since you can easily know if you can afford to take out a mortgage or not (and how big this loan can be).

In times when interest rates are very low, you can also have an advantage if you think you know that interest rates are on the rise in the future. If you can fix your mortgage interest rate at the right time you can get a low fixed interest rate and when the interest rate then rises after you have tied up your loan then you are sitting there with an interest rate lower than what you would have had if you had chosen a variable interest rate . However, it should be remembered that it is not easy to succeed with such a maneuver if you are not familiar with interest rate policy and can come across a good interest rate.

Then it should also be said that the disadvantage of fixed interest rates is that it will normally be more expensive than variable interest rates. From a historical perspective, this has been the case (with some exceptions as it pays to raise its interest rate). You usually have to pay a little extra to have the collateral that comes with a fixed interest rate, which is why the total variable interest rate usually becomes cheaper.

Why is it better then to have a fixed interest rate if you have small margins in your finances, if it is usually cheaper with variable interest rates? The answer to that is that with small margins, it also manages interest rate changes worse. The variable interest rate can be changed and if it is raised a bit, it is possible that you suddenly cannot afford to pay anymore. There is quite a difference between an interest rate of 3% and an interest rate of 4%. This means an increase of about 33% of your interest costs each month.

Variable interest rate

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If you choose a variable interest rate, your interest rates will change every three months (then it is possible that the interest rate will not change, but the possibility exists). You often call the variable interest rate a three-month rate, which is actually closer to the truth. Because you actually commit yourself three months at a time. As your interest rate changes as the interest rate market develops, it may increase or decrease quite a lot depending on what is happening in the country.

The biggest advantage of choosing a variable interest rate is that you will probably save money overall. Usually it is cheaper in the short term with a variable interest rate, although it moves up and down a bit. This is because you usually set the level of fixed interest rates a little higher. How high the fixed interest rate is depends in part on what the banks predict about the future of the interest rate plus a small imposition on the extra security that fixed interest rates entail.

Another advantage of variable interest rates is that it becomes easier to change lenders if you so wish during the loan period. You can at any time (at three-month intervals) choose to transfer your loan to a bank that you think works better or that has a lower interest rate. This way, you have a very good negotiating position and you also do not have to pay interest rate compensation, which you would do if for any reason you decide to settle a mortgage with a fixed interest rate (something that rarely pays off).

Make sure you have a buffer

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The disadvantage of variable interest rates is that you do not have the same security. You can never know exactly how much money you will have to spend on your interest expense each month in the future and therefore you also do not know exactly how much you have to budget to meet the cost of the mortgage. When choosing variable interest rates, you should include in your budget to be able to manage an interest rate level that is a few percent above the current level, just to be on the safe side.

Most people who choose a variable interest rate also try to save money in the form of a buffer when the interest rate is low. In 2014, for example, the mortgage rate was very low and then it is also very cheap with mortgages. When it is so cheap, it is wise to put money away for the future precisely because you do not know how high the interest rate can be in a few years.

A good tip is to spend more each month on the mortgage than it costs. For example, say that you have an interest rate of 4% and that it would cost X amount of USD each month. Instead of putting this aside, you set aside to pass an interest rate of 6%. The money you save in your account can then be used to pay the interest rate during the periods it rises or you can, for example, use the saved money to make extra repayments. Just remember not to amortize your entire buffer.

When choosing a fixed or variable interest rate, you must of course weigh the advantages and disadvantages to each other. What you should consider is if you think it is worth the little uncertainty that a variable interest rate brings to get a slightly cheaper loan or if you would rather pay a little more for greater security. What one should know is that a large majority of people choose to drive at variable interest rates and this is usually a good choice.

It is also possible to mix solid and mobile

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You don’t actually have to make a choice on either fixed or movable, but there are alternatives as well. If you wish, you can divide your mortgage into two or more different parts. For example, you can have half the loan with variable interest and the other half tied up in 5 years. You can also divide it so that you have several different binding times. Depending on what you know yourself (in consultation with the lender) is best for you.

The idea of ​​dividing their mortgage into different parts is that you should be able to get the best of both worlds, so to speak. If you feel that you want a certain amount of security, but at the same time feel that you want to enjoy the benefits of a low variable interest rate that changes with the market then you can run on some variable and some tied.

Of course, it doesn’t have to be better to do this, but it creates opportunities to put together a solution that you enjoy and that fits your own financial situation. Together with your bank, you can come to a compromise between solid and mobile that you feel satisfied with. If you feel that you need some security when it comes to monthly costs (for example, because you have slightly smaller margins) but you still do not want to tie up the entire loan, then this may be an option.

However, you should remember that a loan with several different bonding times or with some tied and some movable has certain disadvantages. The big disadvantage is that you cannot negotiate or bargain on your mortgage as easily . To be able to negotiate in the best way, one must be able to threaten to leave his bank to choose another bank with better conditions. If you have part of your loan unlocked at the current bank, your threats simply will not be as powerful.