Where can you find the lowest interest rate?

Where would you find the lowest interest rate, or does it even matter in the end?

Buying a home is usually a reasonably big deal. It involves a fairly long-term commitment and a considerable amount of money. If, and usually when, the purchase is financed by a loan, it is of course important to be careful about the terms of the loan and the length of the commitment.

It is very common for the choice of a home to be driven by its price. What kind of home could I get on my best income? So let’s start by finding out the price of money.

Typically, banks offer their mortgages for 12 months euribor and add their own margin on top. Depending on the bank, the mortgage may also be tied to a three- or six-month equivalent, or even a fixed rate. The rule of thumb is that the shorter the better. In other words, loans with different interest rates are available on the same value date. We have lived through a long period of exceptionally low interest rates, but the situation has changed rapidly. As a result, banks may be rather reluctant to offer any interest rate period at all in the current situation.

However, when taking out a mortgage, it is important to take a very long-term view. It is somewhat difficult to predict what the world economy will look like in, say, ten years’ time, let alone your own. That is why it is better to be a pessimist than an over-optimist. For example, a year ago (15.11.2021) the 12-month Euribor was -0.480%. Negative. Now the Bank of Finland announces that the 12-month Euribor is +2.811% (11.11.2022). So in just one year it has risen by 3.291%. Quite a lot, I would say.

“Naturally, you want a cheaper rate, because hey, it costs less!”

It is easy to forget that a lower interest rate is valid for a correspondingly shorter period. When it comes to buying a home, it is easy to focus only on that percentage. For comparison, on 11.11.2022 the six-month rate was +2.291% and the three-month rate was +1.762%. Which tastes better: Almost 3% or less than 2%?

Instead of just staring at the interest rate, it would be a good idea to realistically calculate your own ability to pay and consider a slightly slower interest rate. If only to give yourself more time to react to a potentially unfavourable situation.

Banks stress-test mortgage applicants at a rate of 6% over a 25-year repayment period. In other words, they calculate whether the customer can service their loan at 6%. Six per cent seems like a staggering amount, but it’s not impossible. The last time it was close to that was in the autumn of 2008, when the financial crisis escalated. The stress test assumes that the interest rate is and will remain there at 6% for the duration of the loan. However, such a situation is quite unrealistic – interest rates tend to live. As can be seen, for example, from the fact that interest rates have been negative from 2016 until today. Stress tests are an imported product. They were imported into Finland from abroad almost as such. In many countries, however, mortgages were issued quite lightly (anyone remember the US subprime crisis?). After this collapse came stress tests, but because of their questionable benefits, the Bank of England, for example, is abandoning them.

A mortgage applicant should do an inhoreistic “stress test” on himself rather than being overly optimistic. And choose a mortgage that gives you as much leeway and reaction time as possible. In other parts of the world, fixed-rate mortgages are also popular, where the interest rate is set in stone for the duration of the loan. Of course, the percentage rate is usually higher than for short term mortgages, but it is also much easier to anticipate the cost of servicing the loan and thus to have greater peace of mind. There are banks in Finland that offer such a facility.

Just saying.