Interest rates - FAQ
What rate of interest do we use in our credit evaluation?
When SBAB receives a loan application, we perform a credit evaluation. One part of the credit granting process is to evaluate the applicant's financial ability relating to the size of the loan he or she is applying for. In this evaluation we use a calculated rate of interest that reflects SBAB's forecasted 5 year fixed interest rate, seen over a longer period of time. We consider this to be the interest rate that a persons finance should be able to handle in order to be granted a loan at SBAB.
Naturally, our customers have the freedom to choose the fixation period they want. This calculated interest rate is only used in the credit granting process.
What is compound rate of interest?
We use compound rate of interest to make loan expenses comparable between different lenders. In the calculation we take into consideration how often payments are made. If you make interest payments quarterly, your mortgage will have a higher compound rate of interest than if you make payments once a year. In practice, the two variations are of equal cost if the interest rate is the same. But if you make payments quarterly, you miss out on income in form of interest from the bank that you would have received throughout the year.
In calculating the compound rate of interest we also consider other costs, such as payment fees and general administration expenses that are expressed as part of the yearly interest on the mortgage.
Why are the floating and the fixed rates not moving in the same direction?
SBAB's rates are determined by our exchange rates on the financial market.
Short-term interest rates and with that the floating interest rate is determined by the Riksbanks (Sweden's central bank) and its key interest rate, the repo rate.
The fixed interest rates follow the long-term bond interest rate for the corresponding currency. They are affected to a great extent by what is going on in the international interest rate-markets, but also by the fixed exchange rate and expectations on the economy in respective countries.
Changes in the repo rate and the bond interest rates do not always move in the same pace, and so the differences between the floating and the fixed rates sometimes vary.
Why does SBAB sometimes adjust their floating rate even though the Riksbank has not changed its repo rate?
SBAB's floating rate is fixed in three month-periods. Expectations on a change in the repo rate throughout this time are enough for us to adjust our floating rate. With that expectation, which is priced on the monetary market, and our exchange rates are adjusted. As a consequence, we have to adjust our interest rates. Our changes in interest rates, both up and down, can therefore pre-empt those of the Riksbank.
Is it risky to have solely floating interest rate on ones residential mortgage?
No, not if your personal finances allows a temporarily higher interest rate. A prognosis of the repo rate, and with that the floating rate, is based on a prognosis of the inflation. But you can never be a hundred percent certain of a prognosis of the inflation or in what direction the repo rate is moving. There is always a chance that the inflation increases or decreases more than expected, which then affects the repo rate.
Is it safer to have fixed rate on ones residential mortgage?
Yes, in the sense that you will know the exact loan expenses during the fixation period. The long-term interest rates are normally higher than the floating rates, and you could think of it as paying a sort of premium for the safety of knowing your loan expenses when choosing a fixed interest rate.
There are no recommendations on having solely floating or fixed interest rates on ones residential mortgages. Interest rate forecasts are always uncertain, and if you divide your loan on different fixation periods you spread the risks.
How should one reason when choosing between floating and fixed interest rates?
You should not only look at the relation between floating and fixed interest rates as it is today, but also consider in which direction the floating rate is moving. But what to think of the development of interest rates and how to reason facing a decision?
You could start by studying analysis and forecasts from different experts, and try to form your own opinion. When you make your decision, it is above all a question of your own will and ability to take risks. Your own financial situation must decide.
What is interest compensation and in what situation does it apply?
If you re-pay your mortgage in advance, you might have to pay interest compensation. If a customer has a residential mortgage with an interest rate fixed for five years, SBAB has to make sure we have corresponding funding. Both SBAB and our borrower have undertaken to pay the set interest rate for five years.
If SBAB's borrower chooses to terminate his or her loan before the end of the fixation period, SBAB must keep paying the exchange rate while the borrowers payments stop. Since we receive the total amount in return, we can now invest it. But if that can not be done to a higher interest rate than what we received from our borrower, SBAB makes a loss. According to the Consumer Credit Act, the customer has to pay interest compensation for the lenders loss. It is calculated on the remaining fixation period.