Mortgage - recession proofing 2019
August 14, 2019 9:00 AM Subscribe
Buying our first house, can we protect ourselves against a possible recession in the next 5 years?
TL;DR: How to mortgage our house to minimise the impact of a potential upcoming recession
My fiancée and I (late thirties living in Sweden) just signed the contract to buy our first house. We are currently renting a flat and we have a baby and a preteen, so the extra space, garden etc. is very much welcome.
The house is well within our means; the bank would have lent us at least 50% more based on just one income, so we are not going bankrupt even if our monthly payments increase suddenly. Also, we managed to buy the house at a relatively low price per square meter for the area. We are probably going to want to upgrade to a larger house within 5-10 years, although this one is big enough to fit our family. This way we should avoid getting in a situation where we suddenly have to take a bad deal because we *need* to move.
Mortgage wise, we have some options:
1.49% interest fixed 3 years
1.62% interest fixed 5 years
2.18% interest fixed 8 years
2.88% interest fixed 10 years
variable interest w. 1.89% interest ceiling, renegotiated in 5 years
I am no economist, but these rates are really low and the house prices here are historically high. There seems to be a growing consensus that this is unsustainable and that a new recession is coming - meaning much higher interest rates and lower house values to match. In our neighbouring Denmark, mortgage rates are now *negative*, meaning on the one hand, money is cheap, but isn't the corollary that the wealthy people/financial institutions lending the money are convinced that we are heading for such an extended financial downturn that over the next 20-30 years, even a zero percent return on their investment is a good deal. In short: they expect a lengthy and devastating double dip recession.
So if I believe that to be likely, what can I do to safeguard my family's finances given that we do need a place to live? Go for the longest (10 year) fixed interest? Increase our amortisation and pay back the mortgage in <10 years? Minimise our amortisation and count on investing the difference with a better return than paying off the mortgage (might not be so easy in a recession). Maybe split the mortgage into two or more smaller loans with different interest rates and durations?
Or?
TL;DR: How to mortgage our house to minimise the impact of a potential upcoming recession
My fiancée and I (late thirties living in Sweden) just signed the contract to buy our first house. We are currently renting a flat and we have a baby and a preteen, so the extra space, garden etc. is very much welcome.
The house is well within our means; the bank would have lent us at least 50% more based on just one income, so we are not going bankrupt even if our monthly payments increase suddenly. Also, we managed to buy the house at a relatively low price per square meter for the area. We are probably going to want to upgrade to a larger house within 5-10 years, although this one is big enough to fit our family. This way we should avoid getting in a situation where we suddenly have to take a bad deal because we *need* to move.
Mortgage wise, we have some options:
1.49% interest fixed 3 years
1.62% interest fixed 5 years
2.18% interest fixed 8 years
2.88% interest fixed 10 years
variable interest w. 1.89% interest ceiling, renegotiated in 5 years
I am no economist, but these rates are really low and the house prices here are historically high. There seems to be a growing consensus that this is unsustainable and that a new recession is coming - meaning much higher interest rates and lower house values to match. In our neighbouring Denmark, mortgage rates are now *negative*, meaning on the one hand, money is cheap, but isn't the corollary that the wealthy people/financial institutions lending the money are convinced that we are heading for such an extended financial downturn that over the next 20-30 years, even a zero percent return on their investment is a good deal. In short: they expect a lengthy and devastating double dip recession.
So if I believe that to be likely, what can I do to safeguard my family's finances given that we do need a place to live? Go for the longest (10 year) fixed interest? Increase our amortisation and pay back the mortgage in <10 years? Minimise our amortisation and count on investing the difference with a better return than paying off the mortgage (might not be so easy in a recession). Maybe split the mortgage into two or more smaller loans with different interest rates and durations?
Or?
Take the longest fixed period you can get. It might be higher than other rates you could get for shorter periods, but it will guarantee a stable payment, which is more important in the long term.
posted by Autumnheart at 9:35 AM on August 14, 2019 [2 favorites]
posted by Autumnheart at 9:35 AM on August 14, 2019 [2 favorites]
If I understand the framing of your question correctly, you're starting with the premise that loan rates are low (i.e. money is cheap) but houses are expensive. And you expect the money to get more expensive in the future, while houses get relatively less expensive/valuable. Given those assumptions/forecasts, it seems like the answer would be to get the longest-term fixed mortgage you can get your hands on. I'd also be particularly wary of variable rate products, since they could get you the worst of both worlds: high loan value and high interest.
posted by craven_morhead at 9:36 AM on August 14, 2019 [11 favorites]
posted by craven_morhead at 9:36 AM on August 14, 2019 [11 favorites]
Interest rates generally don't rise during a recession. But I agree with you about house prices falling.
Anecdotally, we bought our current house (in the UK) right at the bottom of the last recession. Because the house prices were falling due to a drop in demand, we managed to negotiate a 15% discount from the seller - the house had already been on the market for a year. Just over 10 years later, our house is worth approx. 30% more than we paid, and interest rates haven't gone up in any significant way. We decided against the longer-term fixed rate mortgage options, and just ended up on the bank's standard variable rate, pinned at just slightly over the base rate. So we basically took a gamble on the fact that interest rates weren't going to recover. And that paid off, because they haven't really. A couple of years ago we switched to a fixed-rated deal thinking that surely soon we'd see an increase in interest rates. Still no sign, and we're probably on the edge of the next recession.
If I weren't almost at the end of my mortgage term, I'd probably gamble on interest rates remaining very low for several years to come, and maybe either go with a 3-year deal or the variable one. It might be worth asking about what happens if you default to whatever standard rate the bank charges for people who are not on any particular deal. This was certainly a viable option in the UK for a while, although it may well have changed.
The situation in your country may be different from mine, so please take the above with a pinch of salt. What also matters is how predictable you need your mortgage payments to be; we were lucky enough to be able to pay our mortgage down quite rapidly with overpayments etc.
posted by pipeski at 9:37 AM on August 14, 2019 [1 favorite]
Anecdotally, we bought our current house (in the UK) right at the bottom of the last recession. Because the house prices were falling due to a drop in demand, we managed to negotiate a 15% discount from the seller - the house had already been on the market for a year. Just over 10 years later, our house is worth approx. 30% more than we paid, and interest rates haven't gone up in any significant way. We decided against the longer-term fixed rate mortgage options, and just ended up on the bank's standard variable rate, pinned at just slightly over the base rate. So we basically took a gamble on the fact that interest rates weren't going to recover. And that paid off, because they haven't really. A couple of years ago we switched to a fixed-rated deal thinking that surely soon we'd see an increase in interest rates. Still no sign, and we're probably on the edge of the next recession.
If I weren't almost at the end of my mortgage term, I'd probably gamble on interest rates remaining very low for several years to come, and maybe either go with a 3-year deal or the variable one. It might be worth asking about what happens if you default to whatever standard rate the bank charges for people who are not on any particular deal. This was certainly a viable option in the UK for a while, although it may well have changed.
The situation in your country may be different from mine, so please take the above with a pinch of salt. What also matters is how predictable you need your mortgage payments to be; we were lucky enough to be able to pay our mortgage down quite rapidly with overpayments etc.
posted by pipeski at 9:37 AM on August 14, 2019 [1 favorite]
We just took a 5-year fix on the basis that interest rates aren’t likely to get very much lower (ie there’s not much room to reduce them by that much) but they could get much higher. If I’m made redundant and we have to sell we’ll just have to take the penalty for exiting the mortgage early. I’m also in the UK and am assuming that Brexit will not improve the local economy.
posted by plonkee at 9:52 AM on August 14, 2019 [1 favorite]
posted by plonkee at 9:52 AM on August 14, 2019 [1 favorite]
we were lucky enough to be able to pay our mortgage down quite rapidly with overpayments etc.
This is what we did too - get the longer-term mortgage, which means a lower payment, but then pay extra each month. We still end up paying the mortgage off in a fraction of the overall term, but have the flexibility to make the lower payment sometimes if we have unexpected expenses.
Make sure that the banks there don't penalize you for early payoff, though - in the US they generally do not.
posted by something something at 10:04 AM on August 14, 2019 [4 favorites]
This is what we did too - get the longer-term mortgage, which means a lower payment, but then pay extra each month. We still end up paying the mortgage off in a fraction of the overall term, but have the flexibility to make the lower payment sometimes if we have unexpected expenses.
Make sure that the banks there don't penalize you for early payoff, though - in the US they generally do not.
posted by something something at 10:04 AM on August 14, 2019 [4 favorites]
Anyone who says what they know interest rates are going to be in 5+ years is kidding themselves. That said, Fixing your rate on the basis that rates can't go much lower is a reasonable thing to do in the current climate. I'm buying a house right now and am choosing a 30 year fixed for exactly that reason.
I'm not sure if refinancing is a thing in Sweden. It's common in the US and some people do it every couple of years. It's a hassle and it's not free, but knowing it's going to be an option lowers the stakes of the decision you're about to make considerably. I.e. if it turns out to have been the wrong decision, or circumstances change, you change your mortgage and the damage is significantly limited.
With the possibility of refinancing in mind, and given it's impossible to predict future interest rates, the main unknown that is: how long do you plan to live in this house? This is something you know, or can at least do a better job of predicting than anything to do with the econmy. If it's ~X years then a reasonable thing to do is lock in the lowest rate you can for ~X years. If your plans change and you stay longer then you may be able to refinance when the rate jumps in X+1.
Have you actually calculated the monthly cost of an additional 0.1 or 0.5 or 1% at your loan balance? It's not nothing, and it adds up to a lot over 30 years, and you should get the lowest rate you can, all other things being equal. But you may be overthinking, especially if it's likely that you'll refinance or move before you pay the loan off in full.
posted by caek at 10:08 AM on August 14, 2019 [1 favorite]
I'm not sure if refinancing is a thing in Sweden. It's common in the US and some people do it every couple of years. It's a hassle and it's not free, but knowing it's going to be an option lowers the stakes of the decision you're about to make considerably. I.e. if it turns out to have been the wrong decision, or circumstances change, you change your mortgage and the damage is significantly limited.
With the possibility of refinancing in mind, and given it's impossible to predict future interest rates, the main unknown that is: how long do you plan to live in this house? This is something you know, or can at least do a better job of predicting than anything to do with the econmy. If it's ~X years then a reasonable thing to do is lock in the lowest rate you can for ~X years. If your plans change and you stay longer then you may be able to refinance when the rate jumps in X+1.
Have you actually calculated the monthly cost of an additional 0.1 or 0.5 or 1% at your loan balance? It's not nothing, and it adds up to a lot over 30 years, and you should get the lowest rate you can, all other things being equal. But you may be overthinking, especially if it's likely that you'll refinance or move before you pay the loan off in full.
posted by caek at 10:08 AM on August 14, 2019 [1 favorite]
There are professional, highly-trained, smart economists, actuaries, and mystics with access to tons of data who try to figure this out. They can't and neither can you. If you believe housing prices will drop, rent a bigger space. When I was in this situation, I bought a house because I wanted a house, stability, ownership. Market tanked, house value dropped, rose again and then some over time. Decide if you are buying primarily a home or an investment; that will help you figure it out.
posted by theora55 at 10:32 AM on August 14, 2019 [1 favorite]
posted by theora55 at 10:32 AM on August 14, 2019 [1 favorite]
I would avoid the variable interest rate because then you just don't have to worry that your payment will get that much higher.
It seems that, short of climate emergency and catastrophic economic doom (not entirely unlikely!), the real possibility is that in a few years you'll want a bigger house and house prices will be lower, but you won't be able to sell your house because not enough people are buying houses and you won't make as much as you paid. If you have the ten year option, will you put money aside? That would give you a buffer if you want to buy another house and can't sell your current house.
But as long as you can afford your mortgage, which you can, and you can ride out a recession, which you can because your house is big enough, it seems like buying a house with a fixed rate mortgage is a sensible approach to economic stability.
posted by bluedaisy at 11:54 AM on August 14, 2019 [2 favorites]
It seems that, short of climate emergency and catastrophic economic doom (not entirely unlikely!), the real possibility is that in a few years you'll want a bigger house and house prices will be lower, but you won't be able to sell your house because not enough people are buying houses and you won't make as much as you paid. If you have the ten year option, will you put money aside? That would give you a buffer if you want to buy another house and can't sell your current house.
But as long as you can afford your mortgage, which you can, and you can ride out a recession, which you can because your house is big enough, it seems like buying a house with a fixed rate mortgage is a sensible approach to economic stability.
posted by bluedaisy at 11:54 AM on August 14, 2019 [2 favorites]
I bought my first house when interest rate had dropped from a high of 17% down to a "great rate" at 12.75%. We refinanced at 10% and again at 8%. After that experience, we have always gone for the longest fixed rate we can get (in the US, usually a 30 year mortgage) and then taken advantage of the option to refinance when it made sense. Personally I would rather pay a little more for certainty of knowing that what I'm paying is within my budget. In your case, interest rate aren't going to drop all that much (they won't go below zero) but they could rise considerably, so again, the 10 year mortgage makes sense to me.
posted by metahawk at 12:15 PM on August 14, 2019 [1 favorite]
posted by metahawk at 12:15 PM on August 14, 2019 [1 favorite]
Be aware that, the longer the term over which the rate is fixed, the higher the cost to break the deal if you need to repay the mortgage during the fixed-rate period. So unless you're 100% certain you're not intending to move house, split up, etc. you might not want to tie yourself into the longest term.
posted by essexjan at 3:01 PM on August 14, 2019 [2 favorites]
posted by essexjan at 3:01 PM on August 14, 2019 [2 favorites]
Notes for Americans: assuming Sweden works more like the UK (which seems likely based on question wording), a fixed mortgage is fixed for X years and then variable for the remainder of a (typically 25 year) term, what in the US would be called an ARM. And there are typically early payment penalties if you try and pay off the mortgage (i.e. refinance) in the fixed period, so a long term fixed rate is not as conveniently disposed of.
posted by How much is that froggie in the window at 4:17 PM on August 14, 2019 [4 favorites]
posted by How much is that froggie in the window at 4:17 PM on August 14, 2019 [4 favorites]
The devil is probably in the details for these loans. I'm answering as I understand fixed loans in Australia, but that is probably different in Sweden. (Also, I don't fully understand Australia's system, mortgages are complicated).
Breaking a fixed loan, even to sell a house, can cost a fortune here if interest rates have dropped, so I wouldn't fix past 5 years if you are planning to move about then. But the variable rate cap isn't that different, so you could ride the market and see if you picked it right. Not knowing your loan size, I can't do the maths, but the difference is probably not obnoxious.
In Australia, we can't pay (much) extra on a fixed loan, but can on variable. We can often redraw extra paid on the variable, if needed. If you can't access the extra money you've paid, I don't like the idea of locking money away if I don't have to, and the interest you save will be minimal as the rate is so low. There are probably people spending more on coffee every year than you will be spending on interest.
I would, assuming that your loans are similar to ours, fix for five years and save up a large pile of cash for the next house (or to chunk on this one if I decide to stay in it). I like offset accounts for saving instead of paying off the mortgage, but you may not have those. If you think there will be a recession soon, then you probably don't want to invest that extra money, as the market may have dropped when you need it. I like large piles of money when I'm feeling anxious, but other people find that they accidentally spend large piles of money, so YMMV.
If the housing market drops significantly, you may run into issues when you try to refinance or sell. You may not be able to refinance to get a better rate at a different bank (this may not be applicable in Sweden), as your house isn't worth as much as it used to be. If you sell, you may have to pay money to the bank. And you will have trouble selling if no one is buying. Hopefully, you're buying something pretty boring and easily resellable, even if the price has dropped. If you have a large pile of money, that will be annoying, but not the end of the world. You will be able to buy easily though, if it's a buyers market, and if you've got enough left over for a deposit after selling the old place. If you don't have enough money, you may be stuck either in the old house or renting and having to save up a deposit again. Neither is the end of the world, worse things happen in recessions, but it's a possibility. If you really need a bigger place but can't sell, you could rent out the first place and rent somewhere bigger. Also, not the end of the world, but not necessarily ideal if you don't want to be a landlord.
There may also be tax implications, depending on deductions for the interest on the mortgage. If you think you might want to rent this place out, it's worth checking that out before you buy as there might be ways that work better for that.
You need to check all these things for Sweden, understanding that laws and practices may have changed in 5 years when you revisit it. I'm working towards saving enough so that I can get rid of my mortgage ASAP, because I find mortgages stressful and I just want to not have to deal with it.
posted by kjs4 at 7:39 PM on August 14, 2019 [2 favorites]
Breaking a fixed loan, even to sell a house, can cost a fortune here if interest rates have dropped, so I wouldn't fix past 5 years if you are planning to move about then. But the variable rate cap isn't that different, so you could ride the market and see if you picked it right. Not knowing your loan size, I can't do the maths, but the difference is probably not obnoxious.
In Australia, we can't pay (much) extra on a fixed loan, but can on variable. We can often redraw extra paid on the variable, if needed. If you can't access the extra money you've paid, I don't like the idea of locking money away if I don't have to, and the interest you save will be minimal as the rate is so low. There are probably people spending more on coffee every year than you will be spending on interest.
I would, assuming that your loans are similar to ours, fix for five years and save up a large pile of cash for the next house (or to chunk on this one if I decide to stay in it). I like offset accounts for saving instead of paying off the mortgage, but you may not have those. If you think there will be a recession soon, then you probably don't want to invest that extra money, as the market may have dropped when you need it. I like large piles of money when I'm feeling anxious, but other people find that they accidentally spend large piles of money, so YMMV.
If the housing market drops significantly, you may run into issues when you try to refinance or sell. You may not be able to refinance to get a better rate at a different bank (this may not be applicable in Sweden), as your house isn't worth as much as it used to be. If you sell, you may have to pay money to the bank. And you will have trouble selling if no one is buying. Hopefully, you're buying something pretty boring and easily resellable, even if the price has dropped. If you have a large pile of money, that will be annoying, but not the end of the world. You will be able to buy easily though, if it's a buyers market, and if you've got enough left over for a deposit after selling the old place. If you don't have enough money, you may be stuck either in the old house or renting and having to save up a deposit again. Neither is the end of the world, worse things happen in recessions, but it's a possibility. If you really need a bigger place but can't sell, you could rent out the first place and rent somewhere bigger. Also, not the end of the world, but not necessarily ideal if you don't want to be a landlord.
There may also be tax implications, depending on deductions for the interest on the mortgage. If you think you might want to rent this place out, it's worth checking that out before you buy as there might be ways that work better for that.
You need to check all these things for Sweden, understanding that laws and practices may have changed in 5 years when you revisit it. I'm working towards saving enough so that I can get rid of my mortgage ASAP, because I find mortgages stressful and I just want to not have to deal with it.
posted by kjs4 at 7:39 PM on August 14, 2019 [2 favorites]
I personally dislike those five-year-fixed/adjustible-rate mortgages. They're gambling: the banks are betting that you'll get stuck with an insanely higher interest rate at the end of five years (and that they'll get a lot more money out of you over the long term), you're betting that the interest rates will either be lower or won't rise too much compared to current rates. If you're fairly sure that you're going to be relocating in under five years, go with a 5-year-fixed. But if you want to live there until you decide to sell, and you have no idea when that might be...be cautious, and go for the longest-period fixed-rate.
Are you planning on relocating in five years? Then a super-low rate would be okay, because you're going to sell before the interest rate spikes on this loan. Do you plan to stay there more than five years? Go cautious. Get the lowest rate for as long as possible.
If possible, work with a bank that hangs onto most of its mortgages. (This may be less of an issue in Sweden than in the US.) This prevents your mortgage from being resold so many times you can't actually find which bank holds your home's paperwork.
Start saving up enough money for 3-5 years' worth of mortgage payments, to have if you hit the financial skids. Banks the world over love fewer things than a steady payment history.
If you can pay money directly toward your principal, do so - but don't overdo it until you've been there 5 years and/or built up a good cushion for mortgage payments.
posted by Tailkinker to-Ennien at 7:57 PM on August 14, 2019 [2 favorites]
Are you planning on relocating in five years? Then a super-low rate would be okay, because you're going to sell before the interest rate spikes on this loan. Do you plan to stay there more than five years? Go cautious. Get the lowest rate for as long as possible.
If possible, work with a bank that hangs onto most of its mortgages. (This may be less of an issue in Sweden than in the US.) This prevents your mortgage from being resold so many times you can't actually find which bank holds your home's paperwork.
Start saving up enough money for 3-5 years' worth of mortgage payments, to have if you hit the financial skids. Banks the world over love fewer things than a steady payment history.
If you can pay money directly toward your principal, do so - but don't overdo it until you've been there 5 years and/or built up a good cushion for mortgage payments.
posted by Tailkinker to-Ennien at 7:57 PM on August 14, 2019 [2 favorites]
Response by poster: Wow, so many fantastic answers - thanks so much!! As a few people have mentioned, in Sweden there is a penalty for breaking a fixed mortgage before the agreed term (even to sell the house), so if we expect to move in 5-8 years (which we do) then the 10-year fixed would incur this penalty.
And to @theora55's point; we are of course buying the house to live in it, not as an investment. That fact does make it somewhat less important what the housing markets do as long as we can afford our mortgage payments and don't have to sell.
So it seems that there is mostly consensus here around the 5-year fixed option - and saving up a pile of money to ensure that we can afford to move in 5 years even if house values have dropped.
posted by JensR at 1:05 AM on August 15, 2019 [1 favorite]
And to @theora55's point; we are of course buying the house to live in it, not as an investment. That fact does make it somewhat less important what the housing markets do as long as we can afford our mortgage payments and don't have to sell.
So it seems that there is mostly consensus here around the 5-year fixed option - and saving up a pile of money to ensure that we can afford to move in 5 years even if house values have dropped.
posted by JensR at 1:05 AM on August 15, 2019 [1 favorite]
JensR, this does not address your specific question so feel free to have the mods delete if you don't find it helpful. One of my Swedish brothers-in-law got caught during a recession in Sweden many years ago when he and his family could not sell their radhus (townhome) for maybe a year after buying a new single-family home in the same town.
The family was forced to pay two mortgages that they could not actually afford to pay, and things got ugly. If Sweden goes into a recession and you still want to move to a larger place in 5 or so years, make sure to successfully sell your current home before you invest in another place. Of course, that's good advice recession or not. Congratulations on your new home!
posted by Bella Donna at 6:33 AM on August 15, 2019 [1 favorite]
The family was forced to pay two mortgages that they could not actually afford to pay, and things got ugly. If Sweden goes into a recession and you still want to move to a larger place in 5 or so years, make sure to successfully sell your current home before you invest in another place. Of course, that's good advice recession or not. Congratulations on your new home!
posted by Bella Donna at 6:33 AM on August 15, 2019 [1 favorite]
This thread is closed to new comments.
posted by praemunire at 9:26 AM on August 14, 2019 [1 favorite]