The constant question of whether to choose a variable or fixed / fixed interest rate on the mortgage loan lives on. There are advantages and disadvantages to both alternatives, but often the variable interest rate will usually win, because in the long term it usually becomes cheaper. However, this does not mean that there are no situations when you should fix your interest rate. The question is just when?
First, a brief explanation of variable interest rates and fixed interest rates for those who are not so well versed.
Variable interest rates on mortgages actually mean that they are still tied, but only for three months at a time. It is often also called a three-month rate. That it is called variable is because three months is counted as a relatively short time. Variable interest rates mean that the interest rate can be changed every three months as a result of how the interest rate generally goes, both up and down.
Fixed interest rates mean that you fix your interest rate at a certain percentage point for a certain period of time. You can tie it in one, two, three, five, seven or ten years for example. However, it is most common to tie it for a few years at a time. The interest rate you get when you fix the interest rate is usually a little higher than the variable interest rate, so you have to pay a little extra for the security that the fixed interest rate implies.
The usual advantages and disadvantages of the various options
Each time you compare variable interest rates and fixed / fixed interest rates, the various advantages and disadvantages come to light. Variable interest rates have a couple of advantages that usually weigh quite heavily. The biggest of them all is that it is usually cheapest to have variable interest rates on their loan. In the long term, the variable interest rate is usually lower than the fixed rate and therefore the mortgage loan costs less
Another advantage of variable interest rates is that you are free to change your bank or, for any reason, redeem your loan. When you have a fixed interest rate, you have also tied up during the term and if you want to redeem the loan then it becomes more difficult. You have to pay a fee to the bank in the form of interest rate compensation, which is obviously not so much fun. So it becomes a little harder to change bank, negotiate the loans, etc.
The advantage of fixed interest rates is mainly that it is a greater security for the economy to have a fixed and secure interest rate on its loan. You know exactly how much you are going to pay in interest during the years the interest rate is tied up and you do not have to worry about future interest rate hikes and the like.
The fixed interest rate can often be seen as a kind of security or insurance that protects your finances. You have to pay a little extra to have this insurance, but it means that you do not expose your personal finances to the same risk. Sometimes this can clearly be worth a slightly higher total cost.
Why in certain situations one should consider fixed interest rates
Your finances are quite fragile in such a way that it can easily become a problem if something changes negatively. If you were to get higher expenses or lower income etc then there is a big risk that there will be problems. People have different incomes and expenses and different large margins of course, so for some this is not at all as imminent danger as for others. But for those who have slightly smaller margins in the economy, extra protection is clearly more important.
Fixed interest rates are clearly a protection for an economy with small margins. This is especially true if you have a larger mortgage. The smaller your mortgage, the less you are affected by interest rate hikes, but if you have borrowed more, all increases in interest rates will also be felt by more. If the interest rate goes up, you will have higher interest costs if you run at variable interest rates and this can be a strain on a weak economy.
Occasions when fixed interest rates are extra good
Here are some examples of situations when it is a little extra good to consider tying your mortgage. Bonded loans mean that the interest rate will be fixed during the term of the bond and you will then avoid the risk that the interest cost will rise during that period.
If you have too little buffer – Having a buffer and a buffer saving is very important in a healthy private economy. A buffer is money that should only be used for emergencies, as the money is not enough for, for example, because of unexpectedly high expenses or degraded income. The buffer functions as a security for you to be able to afford to adjust your finances when things change and you get less money to move around.
You can also have a special buffer for the mortgage rate. It basically involves saving money precisely to the interest rate, so that you have some extra security for the day the interest rate goes up. Especially if you choose variable interest rates you need this buffer, because the interest rate can go up quite a bit in the long run and then it is sometimes good to have extra money to take from. In this case, you may save extra money when the interest rate is low and put them away until the day when the interest rate becomes high.
How much should you have in buffer? There are divided opinions about what is right, but many advocate that you have at least two monthly salaries after tax per person. If you are single and receive SEK 20,000 after tax you should therefore have a buffer of at least SEK 40,000 – 60,000 and if you are two who have the same salary then you should also double that buffer. Some say you should have three or more monthly salaries, etc., but that is obviously an individual assessment.
If you have small margins in your finances –
This is the classic reason for choosing fixed interest rates. If it is so that you have quite a bit of money left over after all the bills are paid each month then you do not have much room for increased expenses. The smaller the difference between income and expenditure, the more important it is that you have stability and security in your finances.
It is not particularly good if there is a risk that the expenses suddenly skyrocket, because how can you afford it? You can’t just increase your income a little easily, so it probably means you have trouble paying. Maybe you can save it by saving money on other things but it is still risky and even boring.
What you should do when you have small margins in your finances is, first, to adapt your home purchase to your finances, so that you do not buy an overly expensive home and get too high costs. You can easily see what the fixed interest rate would cost in a little longer and make sure that you can afford the interest cost that it entails. If you can afford this and get money over, at least you know that you are fairly safe, because the interest cost will then not rise during the period that you have fixed the interest rate.
Poor saving – You should have a sensible saving in your personal finances.
If you do not, then it is probably either because you have such small margins that you cannot afford to save even though you would like to, or that you waste too much money on things that should really be prioritized clearly lower than savings.
If the problem is that you have bad margins in your finances then we are back to the last point. Then you have a bad starting point and want as much security as possible in your finances. Variable interest rates mean the risk that interest costs will rise in the future and with small margins it can be difficult to manage these increases.
If it is more that you have prioritized other things such as entertainment etc. before saving, it is in a way better, because then it means that you can more easily solve the problem. Start saving more money, because good savings are needed. If you are unable to make a saving of at least a few thousand dollars a month, you should clearly think about whether you can improve your finances and in this situation it is also a good idea to consider bonded mortgages.
If lower incomes break your finances – Imagine that you would encounter some kind of situation that has a negative impact on your finances. Either you would lose income due to illness or unemployment, or you would end up in some other bad situation such as divorce or you would encounter unexpected expenses. How would it affect your finances?
Ideally, you want to be able to recover without incurring debt or ending up in an overly bad situation.
This is usually associated with having a good saving and a good buffer that you can use to solve the situation. The goal is to afford to manage without income or with lower income, etc. for a period of time while coming back.
If you try to test your own finances and do a stress test to see how it would cope if, for example, you lost the job, how does it manage? Can you pay all the important bills? The more money you have saved and the more you can spend each month, the better you will probably be able to manage such a dip in the economy.
If you realize that you would be bad off if you lost income etc then this is also a reason to think about whether it is better to tie the loan. The fixed interest rate on the mortgage is a bit like having a buffer. It is a security that helps you reduce the risk if things go bad. Now, of course, no fixed interest rate will help you if you lose your job, but I mean that for someone who has such an insecure economy, more security is needed elsewhere. Then it is good with fixed interest rates, because you do not have the risk that the interest rate will rise much and that the housing will be clearly more expensive.