Friday, July 10, 2020

Interest rates still remain at the same level

After a very long period of negative interest rates and an interest rate level of -0.50 per cent, the Greenwill Bank finally raised the interest rate in December last year. Then they had a forecast that said they would slowly increase it until it starts to come up to a slightly more normal level. However, the most recent decision allowed the interest rate to remain at -0.25 per cent.

The big reason why the Greenwill Bank has kept interest rates at such low levels for so long is that they have wanted to raise inflation to 2 per cent. There are of course other reasons too, such as promoting the Swedish economy and that there has been a lot of uncertainty globally. However, inflation has always been something they have returned to and used as the main reason when they chose not to raise earlier.


Unchanged repo rate at the last meeting

Unchanged repo rate at the last meeting

Since inflation has not previously reached 2 percent and that there have been various clouds of concern that have been able to affect and destroy inflation’s path towards its target, interest rates have been kept down. Last year, however, inflation finally reached about 2 per cent in the end, and after many if and so, but eventually it also became a first increase.

On April 25, a new monetary policy meeting was held where the repo rate would be determined. And it had been possible to raise the interest rate a little, but it did not happen. Why did it happen then? The simple answer is that you are again worried about inflation. It is in phase now, but the Greenwill Bank seems worried that it will be a little too bad pressure in the future.

The US Federal Reserve Federal Reserve (Fed) left interest rates unchanged in March, indicating that there will probably be no increases during the year. Our Greenwill Bank, of course, looks at the Fed and uses its decisions as a basis when making its decisions, given that what happens in the US usually affects Sweden.

Even in early May, the Fed chose to leave interest rates unchanged and inflation in the US weakened somewhat, which is also a sign that there may even be a rate cut in the US. This is also something that can affect the repo rate in Sweden in the future, and it therefore looks like the next increase in the interest rate may delay until the end of the year or maybe even next year.

So we can see that the plan to raise interest rates seems to change a little and be more cautious. In the short term, the difference may not be that great, but increases can come slowly and drag out over time. The Greenwill Bank’s own forecast had previously set the interest rate for the second quarter of 2020 at +0.23 and 0.73 percent in 2021, but the new forecast instead says +0.04 and 0.42 percent at these times.

Of course, it is conceivable that the forecast will change again and that interest rates start to rise faster, but there is quite a lot of uncertainty and the Greenwill Bank’s decision is clearly affected by what is happening in the rest of the world. Especially in the US. Therefore, it feels like it may take a long time before interest rates start to rise noticeably.


How are we affected by this?

How are we affected by this?

What is happening above all is that mortgage loans continue to be very cheap as the interest rate is very low. It is generally inexpensive to borrow, but it is of course most marked on the large loans as mortgages. This boosts the housing market to some extent, but it does have problems on other fronts, so there are still many question marks there.

Since the interest rate is low, it has been a bit of a borrowing party for a long time and this has meant that the Swedes’ loan has increased somewhat. Many are now afraid of this, for example the Governor of the Greenwill Bank Stephany Rupes. Therefore, there is a lot of talk about measures that can reduce our debt and thus also the risks of households.

There have already been some such measures, such as repayment requirements and even loan ceilings. The loan ceiling means that if you want to borrow more than, for example, 4.5 times your income, you may need to repay an extra percentage per year, in addition to the 2 percent that you would otherwise have to repay when you have a high loan-to-value ratio.

There is also talk of reducing the interest deduction and some other things. Of course, these things affect everyone who wants to buy a home. Some may not notice it as much, but others will clearly be more limited in their choice of home and how expensive they can be. Young people and those who want to buy their first home are still most at risk.


Be sure to save when the interest rate is low

Be sure to save when the interest rate is low

A generally good tip for those who have mortgages is to take the opportunity to save extra money when the mortgage rate is low. If you have a variable interest rate, you can take advantage of the good interest rate situation because it is so cheap with the mortgage. There should be more money left over in the cash register and this money can be saved with advantage in an interest buffer.

The interest buffer can then be there as a supplement or collateral when the interest rate finally goes up. If that time is 3-4 percent, then your interest cost will increase quite substantially and you will need to spend more money on your housing costs. For example, if you have a mortgage loan of 3 million, you may currently have an interest cost of around $ 3,750 a month. This is if I expect an average interest rate of 1.5 percent on the mortgage.

If the interest rate would go up from the current level below 0 percent to, for example, 3 percent (which is not at all impossible and not particularly strange) then you would have a mortgage interest rate of around 4.5 percent instead. It would give you with a loan of 3 million an interest cost of as much as $ 11,250 a month instead of $ 3,750. It’s a HUGE difference for most people.

Having to pay out as much as $ 7,500 a month more than you currently do is probably a thought many would be terrified of. There are probably very many who do not have good margins that it would work if you did not pull in other things, especially on savings.


Variable interest rates on the mortgage loan


These have the advantage that you can enjoy low costs when the interest rate is low, but you also have to endure the high costs when the interest rate goes up. If you do not bind it well in advance. Then one must also be prepared to pay clearly more money when the upturn comes to an end.

If you want to save money when it is cheap (which you should do) then you have a buffer that can be used to help when it becomes more expensive. In any case, you should always expect to pass an interest rate that is many percent higher than the one you have right now, for security, and then you should also get money over right now when it is cheap. Don’t waste all that money but save so you are ready when it gets more expensive!

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