Interest Rates in Sweden. Choosing Optimal Tactics for Your Mortgage and Savings

Having a long history of low interest rates, Sweden and its economy have been heavily impacted by interest rate fluctuations starting in 2022. As of October 2nd, the Swedish central bank has lowered the interest rate from 3.5% to 3.25%. This adjustment influences various aspects of our financial lives, but first and foremost our mortgages and savings. Choosing optimal tactics for your mortgage as the biggest purchase in your life is vital for everyone's financial well-being. Let's dive into interest rates!

Interest Rate Changes in Sweden, Riksbanken

🏡 Mortgages 

The interest rate reduction could lead to lower monthly mortgage payments for homeowners, making homeownership more affordable. This might stimulate increased activity in the real estate market, as cheaper borrowing costs enable more people to purchase homes. This also involves deciding between a fixed or variable interest rate for your mortgage.

An interest rate is the cost of borrowing money or the return earned on savings or investments.

Fixed Interest Rates. A fixed interest rate remains unchanged throughout a certain period of a mortgage (usually 1, 2, 3, 5 or 10 years). This means your monthly mortgage payments will not change, providing stability and predictability in budgeting

Pros:

• Stability: Monthly payments remain the same, making it easier to budget (the most important factor as we speak about the largest purchase in your lifetime)

• Protection: Protect borrowers from potential interest rate increases

Cons:

• Often Higher Costs: Fixed rates might be higher than initial variable rates

• Risk: Interest rates might decline while your mortgage is fixed 

Variable Interest Rates. A variable interest rate can fluctuate over time (going up or down), usually every 3 months.

Pros:

• Potential Savings: If interest rates decrease, borrowers can benefit from lower interest rate payments

• Flexibility: Easier to move to a new property if you need it (fixed rates mortgages will require extra payments if a contract needs to be changed)

Cons:

• Uncertainty: Payments can increase considerably if interest rates rise, making budgeting more challenging

• Risk: Greater financial risk 

In summary, choosing between fixed and variable interest rates depends on your financial situation and risk tolerance. Fixed rates offer stability, while variable rates can offer savings but come with more uncertainty.

What to choose: a fixed or a variable interest rate? 

The hardest part of the choice is that there is no official economic forecast promising a decrease or an increase in interest rates. Many homeowners around the world have a fixed interest rate to be protected against potential financial struggles. Fixed interest rates promise you stability on the largest expenditure in your life. Varied interest rates allow you to have the flexibility to move to a new property without an extra cost for breaching a fixed contract with a bank but come at a higher risk. 

Alternative Mortgage Strategies

Fixing a portion of a mortgage is quite a common practice in Sweden. Usually, it is possible to fix up to 60% of a mortgage with varying terms to reduce fluctuations in interest costs. This strategy helps to mitigate risks and avoid sudden, significant increases in interest expenses. Examples:

• 100% of the loan is fixed for 5 years.

• 100% of the loan has a variable interest rate.

• 50% of the loan has a variable rate, while the remaining 50% is fixed for 3 years.

• 60% of the loan has a variable rate, 20% is fixed for 1 year, and the final 20% is fixed for 10 years.

Keep in mind that 10% and 20% might seem like small numbers, but the decision often involves millions of SEK or hundreds of thousands of SEK.

💸 Savings While lower interest rates benefit borrowers, they might result in reduced earnings for savers. Increasing interest rates in Sweden were beneficial for deposit holders as it resulted in higher earnings. Following interest rate reduction, it is crucial to reassess your savings strategy and explore alternative investment options to maximize returns.

If you are in search of a property to purchase, our guidebook "Buying, selling and renovating property in Sweden" will answer all your questions and will prepare you for this important step in your life! To book a personalised consultation regarding buying property or exploring investment instruments in Sweden, click here.