One in five don’t think the interest rate will rise

Almost one in five Norwegians disagree with the experts and refuse to believe that the Bank of Norway follows its own prediction and increases the key interest rate next week.

The Bank of Norway (Norges Bank) has not increased its key interest rate since May 2011. But after more than seven years of dropping and record low interest rates, we are heading for a change of tack. It is virtually certain that the key interest rate will be raised by 0.25 percentage points on Thursday, September 20th.

– If the consumer banks follow suit and increase their interest rates on mortgages, it means an added NOK 200 in expenditure every month for every million you have in debt, says Economist in Sparebank 1, Magne Gundersen, to NTB.

Interest optimists

Almost seven out of ten responded that they believe there will be an increase in the mortgage rates when 1,000 Norwegians recently were asked by Respons Analysis on behalf of Sparebank 1. But wholly 17 per cent, close to one in five, do not believe in any interest rate hike in 2018. A large majority of these confirm that they currently have mortgages.

– There are surprisingly many interest rate optimists in Norway. I suppose some of these responds thus due to a mixture of belief and hope. Perhaps there is also some who stick their heads in the sand. But they will with almost certainty either be disappointed or surprised, says Gundersen.

Change of the times

During the seven years which has gone by since Norges Bank raised the key interest rate for the hitherto last time, a generation of borrowers has joined the market. these have, in general terms, experienced a growing and progressing housing market.

– The notion that interest rates may increase is brand new to many thousands of customers, says Gundersen.

The latest reports from Bank of Norway provide unequivocal signals of increasing interest rates. Both analysts and Statistics Norway expect the key interest rate to rise by about 1.5 percentage points before the end of 2021.

– If the banks increase the mortgage rate with the same percentage, a normal mortgage (within 60 per cent of the cost of purchase) will have an interest rate of around 4 per cent. That may easily become the norm, says Gundersen.

NOK 4,000 more a month

A mortgage of NOK 3.5 million will cost 52,500 extra to pay for a year, or roughly NOK 4,000 kroner every month, according to Consumer Economist in Nordea Bank, Elin Reitan.

– The factual added expense is somewhat lower, partly because of tax deductions on the interest paid. If this is added to the calculation, the increase will be in excess of NOK 40,000 a year, or 3,400 every month, says Reitan.

If you have a loan of NOK 5 million and 1.5 per cent as the current interest rate, the annual increase in expenses will, when the tax deduction is calculated in, be just shy of NOK 57,750 a year – equivalent to NOK 4,800 every month.

Fixed or floating

Seven out of ten Norwegians believe they can handle an increased interest expense of NOK 4,000 every month. This according to a survey conducted by Ipsos on behalf of DNB Real estate last year. Another 10 per cent say that they can manage an increase of up to NOK 3,000.

Consumer economist at DNB, Silje Sandmæl, says to NTB that those who consider a fixed interest rate on their mortgage should not be motivated by making money from it.

– Fixed interest rates can be viewed as a kind of insurance against interest rate hikes in the future, something that is most relevant for young people. Those with a tight economy can benefit from economic predictability for some years to come. One possibility is to tie parts of the loan to fixed rates, says Sandmæl.

She, nevertheless, emphasises the following:

– As long as you have the possibility to pay higher interest rates periodically, it will pay in the long run to have floating interest rates on your loans. That is most likely the main reason why most Norwegians choose floating over fixed interest rates.