Interest rate loans are probably better known as Share Loan. Here, the interest rate is variable, but unlike a generally variable rate loan, interest rates can only be adjusted at carefully agreed times during the term of the loan, for example. every or every five years.
It makes loans cheaper during periods of low interest rates and the frequent interest rate falls, but the overall risk is higher because short-term rates that determine the Share Loan interest rates, often fluctuate more than long-term rates, which underlies the fixed-rate loans.
You can read more generally about mortgage bonds in our overall mortgage loan article. The rest of this article is about Share Loan.
The interest rate adjustment loan was introduced in 1996 and quickly became popular because of the lower interest rate than on fixed-rate loans and because you as a borrower can fix the interest rate until next time it is adjusted.
It makes it significantly easier to calculate how much money you should set aside for interest and repayments on the loan in the coming interest period than if it had been a variable rate loan.
Here follows the interest rate for the Copenhagen Sulod Bank Offered Rate, which changes daily. Therefore, as a borrower, you do not really know how much interest you will pay during the coming year on ordinary variable rate loans.
How often Share Loan is adjusted for interest
Share Loan is usually termed with an F followed by a number. The figure indicates how often the interest rate is adjusted so that an S1 loan is adjusted once a year, while an S3 and S5 are adjusted for each third and fifth year respectively.
You can get adjustable-rate loans with interest periods of up to 10 years, but here is the gain is not as great as it is on your Share Loan, which will be adjusted more frequently
- The S1 loan locks the interest rate for 1 year
- The S3 loan locks the interest rate for 3 years
- The S5 loan locks interest rates for 5 years
So the shorter the time between the interest rate adjustment, the lower the interest rate you can achieve. This is obviously because the banks’ risk is significantly less at short periods between the rate adjustment than if they are to maintain interest rates in, for example, Ten years.
Share Loan can be redeemed at price 100 when adjusted for interest
You also have the option to redeem your Share Loan whenever the loan is adjusted for interest. This means that if you can find a better loan with a lower interest rate before the next time your Share Loan must be refinanced, you can redeem it for the loan’s face value – price 100 – and continue the loan instead. Alternatively, you can always repay the loan by buying the underlying bonds on market terms.
With or without installments – What should I choose?
Do you need extra air in the economy For a period of time, you can choose to make your Share Loan deductible. You can change whether or not the loan is to be loan-free whenever the loan is to be adjusted for interest. However, the loan can be maximum of 10 years free of charge, which means that you only pay interest and contributions in the installment periods and push the installments in front of you.
It has the disadvantage that you will pay higher repayments on the loan, for the remaining time of the loan, the more often you choose to make it deductible. At the same time, you have to pay a significantly higher contribution and higher interest on the loan, as well as price deductions and price cut will be higher on repayment-free loans.
This is because mortgage banks make every effort to move people over to repayments as repayment-free loans increase people’s risk of becoming technically insolvent, that is, the outstanding debt on the loan exceeds the property valuation. It has been a major problem during the economic crisis we have been through the past years.
But used with care – and in as short periods as possible – freedom of deduction may be a good idea. Eg. Because you want to get rid of some expensive consumer or bank loans or because you have to study for a period and therefore have a significantly lower income.
Share cards – interest rate adjustment every six months
In fact, you can get Share Loan with an extremely short period of time between each interest rate adjustment. With Share cards, interest rates are changed every six months, typically until 1 January and 1 July.
Here, the interest rate is completely down, because mortgage banks run a much lower risk. The loan is thus a competitive alternative to S1 and S2 loans because the short-term interest rate is as low as it is currently. This means that you will soon benefit from further interest rates, but it means that you only know the size of your interest for six months in the future.
Therefore, and because the short-term interest rate may fluctuate quite a lot, you need the necessary air in the economy to cope with the rate hikes that may end up in the future. It may also be that you will need to reallocate the loan to a Share Loan with a longer maturity between interest rate adjustments, because Sharecard does not continue to be favorable.
Share Loan T
Another option is the so-called Share Loan T. It is a special Share Loan, which is only offered by a few mortgage banks. It is financed like the normal Share Loan with one-year bonds, but performance before tax is set to correspond to the performance of a 5% fixed rate loan over 30 years.
As the interest rate on the loan corresponds to a Share Loan S1, the interest rate of the loan is significantly lower. This means that the loan loan will be much larger, which in practice means that the entire loan can be settled at just over 16 years, ie slightly over half of the maturity of a 30-year fixed-rate loan!
The shortening of maturity is well supported by the fact that the larger repayments throughout the loan period reduce the amount of interest payments quite efficiently. The monthly benefit will, of course, be much higher than if you, for example, Running with S1 loan, but over a 5-year period, period costs will be significantly lower, as the repayments on the T-loan plot considerably from the amount to be paid interest. Therefore, over time, repayments will not be a major cost for the borrower with a T-loan than those who have an S1 loan – both with and without repayments.
This means again that the risk of technical insolvency with a T-loan will be significantly less than with an S1 loan without repayment. Then there is air in the private economy to it, the T-loan can be a good and effective way to finance its housing.
Alternatives to Share Loan
As an alternative to Share Loan, you can choose a solution from banks called mortgage loans.
A more secure solution, where you know exactly what your loan costs throughout the loan period, can be a fixed-rate mortgage. You can read more about fixed-rate mortgage loans.