Although it may sound tempting with a 30-year fixed-rate 2.5% mortgage loan, it’s a good idea to wait. The new loan disgraces the predictions of many clever economists.
Bank decided to issue a new series of 30-year bonds with a fixed interest rate of 2.5% as the first in the mortgage market. It is historically low, and so far no other companies have taken the same step.
Realkredit Danmark and Nordea have both postponed the decision so far. This is linked to the companies’ expectations of the interest rate and the number of bonds to be issued.
The danger of locking
It could immediately look like a battle for how low an interest rate can be put on the bonds, but it is not. Although there is of course prestige in being the first and largest in the mortgage market, there is also a danger in issuing it. The companies can be accused of luring the borrowers into a trap.
The trap is that the new bond series, at a rapid interest rate increase, risks becoming a series of very few bonds. This is due to the so-called lock-in effect that occurs because the price formation of bonds in a small series is ineffective. Therefore, as a borrower, you run the risk of having to pay too much if you need to redeem the loan in advance.
When Nykredit still opens 2.5% mortgages now, it is a way of saying “we are the largest – so we can allow ourselves to do so first”. It can be called a little bladder, but also very reasonable when Nykredit is the largest.
Wait with new loan
But lock-in is also a real danger for you as a borrower, so you have to take it very seriously if you are about to do something about your loans. You should, as far as possible, avoid getting into a situation of lock-in. Therefore, it is perhaps a good idea to just wait for the situation in the bond market before repatriating a new loan or converting old loans – if it is 30 years and fixed interest rate you go for.
How long do you have to wait? It is probably a good idea to wait until the majority of mortgage companies have entered the market with a 2.5% bond. The risk is, of course, that the interest rate at that time may have increased, but after all, it is better than ending up in a series of lock-in effects. Remember, you can choose loans other than 30-year-olds with a fixed interest rate if you absolutely need to take out the loan now.
Unreliable interest rate predictions
Many economists and not least economists in banks and the mortgage market have long been saying “NOW increases interest rates” or “interest rates will not be lower”. With the new 2.5% loan, we can now conclude that these predictions as often before did not hold.
It clearly shows that smart economists’ predictions about interest rate developments are completely without value to you as a borrower. Therefore, always choose mortgage loans based on knowledge of your personal finances – and not on whether your adviser believes the interest rate will rise or fall.
Remember that before signing a loan.