When interest rates fall, there can sometimes be money saving for homeowners and owners of condominiums if you convert your mortgage to another interest rate. For example, do you have a 6% fixed-rate loan, There may be an idea of having it converted to a lower interest rate.
However, there are some factors one must have in the calculation, among other things the price of the loan when you want to reschedule the loan on the house. Below you can see the concept explained in more detail, and see if it can save you to convert mortgage loans at a lower interest rate or perhaps a fixed rate loan if you have a flexible loan.
Loan consolidation – what is it?
Simply converting or converting a mortgage loan means that you replace the existing loan with a new one. It may be that you will achieve a monthly savings on the interest expense by switching to a lower interest rate loan. There is also the possibility of switching from a fixed rate loan to a repayment loan, or vice versa.
By switching to the interest-only loan, the residual debt does not fall, but in return you pay only the interest. It provides a greater amount of disposable income each month. However, a repayment-free loan can be for a maximum of 10 years, so it must be converted into a new loan. However, it is possible to convert to a new interest-only loan, so that you actually live to rent in your own house, as the residual debt does not fall and thus you do not save value in the house. On the other hand, you have a higher availability amount every month.
A rule of thumb says that it can only respond to converting its loan when the market interest rate has a difference of 2%. to change when the interest rate is 4%.
Mortgage credit conversion
Immediately, it seems most sensible to convert your loan down as you get a lower monthly benefit and more money in your hand. However, it can also be a good advantage to convert up, as this can reduce the residual debt in the house. It probably gives a higher monthly service. But often you can later convert down again, and thus you can save many hundreds of thousands if you run an active conversion strategy.
The reason is that the more the interest rate rises in relation to the loan you have, the lower the price. If, for example, you have a 5% loan, while the market rate is 7%, the price may be 80. This means that you have to put 80 kr on the table, for every 100 kr you owe.
For example, if you owe a million kroner, you have to pay 800,000 to redeem your loan. The 800,000 are then financed with a new mortgage loan. This probably yields a higher interest rate, but on the other hand you now only have a residual debt of approx. 800,000. In fact, the remaining debt will be slightly higher, as there will be capital losses and costs for the conversion.
Must choose a fixed rate or flexible loan
There are two types of mortgage loans. Fixed rate and flexible loans. Fixed-rate loans will have the same interest rate throughout the loan period. For example, if you get a 30-year mortgage loan, you know that the interest expense is, for example, 5% over the next 30 years.
The variable interest rate or flexible loan, as the name implies, indicates a variable interest rate. It is determined for a shorter period, typically 1, 3 or 5 years. The so-called F1, F3 and F5 loans. The advantage of flexible loans is that you typically have a lower interest rate. On the other hand, you are not sure of having this interest rate throughout the term of the loan. For example, if the interest rate rises a lot, it can have a major impact on the interest rate on the flexible loan, and thus on the monthly disposable amount.
When can it be worth changing?
There are some costs associated with consolidation your loan. If you convert to a lower interest rate, you have to repay the old loan. Bond loans can be redeemed at a price. If it is lower than 100, for example course 95, you only get 95 kr for every 100 kr you owe. If you owe a million kroner, you only get paid 950,000 DKK, so the new loan must be 50,000 higher, in order to cover the loss of the exchange rate difference.
You can assume the following rules of thumb if you are considering converting your mortgage:
- The remaining debt must be more than DKK 500,000
- The remaining term must be more than 10 years
- There must be an interest rate difference of at least 2%
What can be saved by reshaping its loan
The savings depend entirely on your current interest rate, the rate and a variety of other factors. Therefore, you should contact your mortgage credit institution to make a calculation of your possible savings at the loan consolidation. Typically, the savings amount to about 1,500 a month, for every million you owe, by switching from fixed-rate loans to new fixed-rate loans. At the bottom of the page you can find links for calculating loan consolidation.
What does it cost to convert loans?
As a starting point you often have to redeem your loan at a lower rate, unless you do it for term, so it can be done at price 100. If you switch to a lower rate, this will mean that the remaining debt on mortgage loans increases while the monthly service fall due to lower interest rates.