Fixed-rate or variable mortgages - which is best?

A few years ago, an unusually large number of people chose fixed-rate mortgages. A large number of those loan deals expire this year, and many are in for a real mortgage shock. – If money is tight it might be wise to fix the interest rate again for another year, says Robert Boije, chief economist SBAB.

Interest rate shocks await customers who went for fixed-rate mortgage loans a couple of years ago and who have been winners in the mortgage market over the past year. (Stock image.)

Interest rate shocks await customers who went for fixed-rate mortgage loans a couple of years ago and who have been winners in the mortgage market over the past year. (Stock image.)

Foto: Erik Nylander/TT

Bolån2023-08-28 16:26

Most mortgage borrowers in Sweden today choose variable rates and are now used to dizzying interest rate storms. A few years ago, the situation was quite different.

The key interest rate was at a record low, and the Riksbank, whose aim was to boost inflation, which was low at the time, had been buying bonds on a large scale to push down long-term interest rates. At the end of 2021, the total share of fixed mortgages was the highest in several years, at 54%, according to Statistics Sweden. Robert Boije, chief economist at state-owned mortgage bank SBAB, told TT news agency that the majority of Swedish mortgage holders chose a lock-in period of more than three months from July 2020 to March 2022.

This is also confirmed by Felicia Schön, private economist at online broker Avanza.

– Many mortgage holders took the opportunity to fix their rates for 1-5 years until the beginning of 2022, she says.

– Those who were able to lock in their loans before the outbreak of the inflation crisis last year have been the big winners over the past year.

Until now that is, when some of the loans that were tied at favorable levels at the time start to mature.

Now most people are opting for variable loans, even though several fixed rates are still below the variable rate and the Riksbank has indicated that it will keep inflation in check with a high key interest rate for a long time to come.

– We are approaching the peak of interest rates. The rate cuts will probably come in a year's time. In that case, it's stupid to be stuck with a high interest rate, says Schön, who nevertheless doesn't want to give specific advice.

– But if money is tight, it might be a good idea to lock in the rate.

After all, most mortgage customers have had time to prepare for the rate storm that awaits them when their fixed mortgage expires, she says, even if it means a sudden jump from 1 percent to 5 percent.

Schön concludes:

– It's often younger people who have the most debt who get hit the hardest.

Historically, it has been cheaper on average to choose variable rates than fixed rates, according to Boije. Another reason why many Swedes have chosen variable rates is the interest differential compensation that customers may have to pay the bank if they redeem their mortgage early, he believes.

SBAB's mortgage forecast recently concluded that the cost of choosing between a one-year fixed rate and a variable rate is now about the same.

– If you think your margins are tight and you are worried about an increase in the variable rate, a one-year fix may be the way to go. But longer fixes don't look so good right now, says Boije. He predicts that mortgage rates will eventually be around 4 percent.

He interprets the Riksbank's signals of tight monetary policy for a long time to come as a bit of a "shell game"; a signal that they do not intend to cut interest rates until they have nipped inflation in the bud.

However, most indications are that inflation will fall significantly during the autumn and that the Riksbank will cut the policy rate next year, he says.

– But the Riksbank is reluctant to do so because it could lead to people spending more, which would reduce the tightening effect of monetary policy on inflation.