Corindigro the best home loan: In recent years, Danish home owners have thrown their love on the good, old fixed-rate mortgages. Recently, the latest statistics clearly showed that for the first time in years, fixed-rate loans are the dominant type of loan on the market.
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But has it actually been the wisest decision to have fixed-rate loans in the past five years – the homeowner’s eternal dilemma: Fixed or flex? Euroinvestor has investigated this question with the help of economist Brian Friis Helmer from Arbejdernes Landsbank.
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We will return to the answer. First, it’s worth bearing in mind that the past five years have seen a couple of big, lucrative conversion waves due to the drop in interest rates. It has also been in the years when the mortgage companies have massively increased the prices on especially the short variable loans such as F1 and F3. During the period, the Danish Financial Supervisory Authority has also tightened the requirements for the flexible loans, and National Bank Director Lars Rohde and a number of economists have continuously warned against the flexible loans.
Golden edge savings
But if a home owner had defied the warnings anyway and five years ago chose an F1 loan rather than a fixed-rate loan, then it would have been a golden saving.
In our comparison, we start from a loan of DKK 2 million. recorded on 1 April 2015. In order to make the comparison most realistic, we assume that the home owner with a fixed-rate loan makes use of the large conversion waves and thus also benefits from the general drop in interest rates. The home owner with an F1 loan keeps the loan for the entire period and must eat the full effect of increases in the contribution rate.
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“Measured in cold cash, looking back, there is no doubt that loans with variable interest rates have been the cheapest overall in the last approx. 5 years. The performance is lower on the F1 loan in the calculation by approx. DKK 43,000 after tax, while you have paid off approx. DKK 66,000 more on the F1 loan. And this despite a down-conversion to a lower benefit and higher installments along the way for the home owner with the fixed-rate loan and a contribution rate that is lower than on the F1 loan,’ says Brian Friis Helmer.
The flex borrower’s overall finances are thus a full DKK 100,000 better after the five years – after tax, mind you.
The sharp increases in fees have in the past five years largely phased out the F1 loan, so that the most used flex loan today is F3 or F5.
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But the fixed-rate loan should in no way be ruled out simply because the logic of the numbers speaks for itself. For many people, the extra cost may indeed be worth all the money, points out the economist from Arbejdernes Landsbank.
“When a home owner is faced with a choice about whether it should be a fixed or variable interest rate, for example in connection with a home purchase, it is very much about security and having your stomach with you. If you live well with the fact that the interest rate can go up and down, and it doesn’t ruin your night’s sleep, and you also have robust personal finances, then it may be obvious to choose a loan with a variable interest rate, which has so far proven to be a good business. But if it comes at the expense of financial security in everyday life and sleep at night, then of course you have to choose a fixed interest rate, even if it turns out to be the most expensive in the long run,’ says Brian Friis Helmer to Euroinvestor.’
Low interest rates as far as the eye can see
However, the sharp decline in interest rates at the long end of the curve in recent years has made the flex loans less attractive.
“However, the difference between fixed and variable interest is significantly reduced in the last part of the period in the calculation. Then we look at the same comparison between an F1 loan and a fixed-rate loan of DKK 2 million. DKK, which is taken up today, the benefit after tax is virtually identical to F1 and a fixed-rate loan of 0.5% after 5 years, while you have paid off approx. DKK 15,000 more on the F1 loan after 5 years,’ says Brian Helmer.
“It has also only become cheaper over the past long series of years to choose security and a good night’s sleep, as the difference between variable interest rates and fixed interest rates has been significantly reduced.
We must remember that how things have gone in the past 5 years is history,’ he says.
In central banking circles, people are currently talking about “low-for-long”, referring to the fact that, regardless of the time horizon, there is nothing to indicate that interest rates will rise significantly.
“It is not the same as a guarantee, because we saw in March, at the beginning of the Corona crisis, how interest rates suddenly skyrocketed. And in a situation with rising interest rates, fixed-rate loans have the advantage that the value of the remaining debt falls as the rate falls. This can provide significant gains in future loan redemptions, which can eventually catch up with the otherwise lower performance on the F1 loan, should this happen. The same characteristic is not found in variable interest loans to the same degree,’ says Brian Helmer.
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