Many events in your life have the potential to overturn your personal finances. It could be redundancies, interest rate jumps, illness or break-ups. You should therefore stress test your finances. Because what will happen if the income drops by 20-30%? Can you handle a 5% interest rate jump? Are you adequately insured in case of disability? Here are some stress scenarios for your finances:
Interest rate jumps:
Although most experts predict relatively low interest rates going forward and stable housing prices, it is not many years ago the interest rate hovered around 7-8%. The financial crisis in 2008 created chaos in the interest rate market. Some banks went out of business, while the remaining ones demanded very high interest rates to borrow from each other. The result was less credit and higher interest rates for consumers. Can we experience it again? Probably not in the immediate future, but one should rely entirely on experts' advice about the interest rate market going forward. They miss the mark, I miss the mark, Norges Bank misses the mark and the Ministry of Finance misses the mark.
Solution: Therefore prepare your finances for an interest rate jump of 5%. Can you cope with a mortgage interest rate in the sevens? Feel free to use the Norwegian Institute for Consumer Research's budget for different types of family finances:
https://www.oslomet.no/om/sifo/referansebudjettet
Note that this is a relatively tight budget. Therefore, you should probably take into account a variant with 25% higher consumption, which is probably a more common everyday life for most people.
Example: A family with two children and a total gross income of 1.2 million will be able to cope a loan of NOK 5.3 million. If consumption is higher, the pain threshold is around 4.5 million.
I guess many will be surprised that such a family can handle such a high loan. This shows, among other things, that there's some room for adjustment when it comes to adapting consumption to accommodate a different interest rate. But such adjustments are not made overnight, and they are not always popular.
Unemployment:
If you become unemployed, it takes an average of six months to get a new job. If you've left voluntarily, you might have received a severance package, ranging from 3-12 months of full salary. But not everyone is so lucky. If you have to rely on unemployment benefits from NAV, it will normally correspond to 62.4 percent of your previous income, but the basis is limited to 6 G, which is around 638,000 kroner this year. This means that you can receive a maximum of 398,400 kroner (with some additional benefits if you have children, are a single parent, etc.)
Solution: Check your spending over the last few months in your online banking and compare this with SIFO's normative budget calculator. This will make it easier to see which expenses you can cut if your income decreases. Continue to pay down your mortgage. If you're unemployed for a few months while waiting for a new job, you might need to borrow against your home equity.
Falling housing prices
If you continue living in your home, a sharp fall in housing prices has no consequences. Yes, the mortgage may eventually exceed the home's value, but banks don't terminate the loan for that reason. The real problem arises if you have to sell the home during a bad period, for example, due to a relationship breakdown. It has happened before. Like in the early nineties when housing prices fell so much that many home sellers ended up with expensive residual loans after selling a home that was worth less than the loan.
Solution: Therefore, you should always strive to pay down the loan, steadily and consistently. Don't let interest-only periods become a crutch. You should at least aim for a buffer of at least 25% of the value, i.e., the loan should not exceed 75% of the market value.
Uførhet
Hvis du blir ufør, risikerer du at inntekten blir halvert. Folketrygden rekker mye kortere enn folk tror. Så selv om det kanskje høres litt flåsete ut, så er inntektstapet faktisk enda verre for høytlønte. Uføretrygden er 66 prosent av snittinntekten din i de 3 beste av de 5 siste årene før du ble syk. Men også her gjelder taket på 6 G i beregningen. Det vil si at du maksimalt kan få 421 000 kroner fra det offentlige, selv om du før kanskje tjente flere millioner kroner.
If you become disabled, you risk your income being halved. Social security is much shorter than people think. So, although it may sound a bit far-fetched, the loss of income is actually even worse for high earners. The disability benefit is 66 per cent of your average income in the best 3 of the 5 last years before you became ill. But here, too, the ceiling of 6 G applies in the calculation. This means that you can receive a maximum of NOK 421,000 from the public sector, even if you previously earned several million NOK.
But what about the job pension? Only the few pension schemes at work have built-in disability insurance. Public sector jobs may have better benefits, but in total you rarely get more than 66% of your previous income covered.
Solution: Buy separate disability insurance, first check if you can get cheap, collective schemes through your job or union . There are mainly two variants:
Disability capital: Provides a lump sum, which can cut the debt
Disability interest: monthly payment until you retire.
It can be smart to choose a combination of these two
Breakup
Divorce is expensive. Assets are to be divided in two, new homes are bought and there are fewer people to share the expenses with.
Solution: Both should own the home. This means that the wife (unfortunately, this is usually still the case) should gradually buy into shared housing. Otherwise, it can be almost impossible to re-establish oneself after a break. You have little or no equity.
Cut the term amount by over NOK 1,000!
You can get better liquidity by changing your mortgage. Here is a 1-2-3 recipe, which everyone should follow. That gives you a thousand kroner more to deal with each month going forward:
Requirement: You have an ordinary mortgage of NOK four million within 85 percent of the rate. The interest rate is 2.00%. The loan is repaid monthly as an annuity loan over 25 years. This gives a installment amount of NOK 17,000. Here's how:
New valuation: Has it been a few years since you bought the home? Get a new valuation. House prices have increased by an average of 7% in the past year. Probably also the value of your home. But the variations are large: In Oslo, prices have increased by 5%. In Trondheim, double that! The bank thus has more security for the borrowed money, which should result in a lower interest rate. Most real estate agents make such a valuation. In some cases, the bank can adjust the price without a valuation by using a database of market prices in your area. Does it perhaps tilt your loan from the original 85% to 75% of the home's value? Then you will probably get a lower interest rate overall, or the bank will delete the top loan and put the entire loan into one loan.
No step-by-step loan: Even if the value of the home has not increased, you should you don't settle for a high interest rate for an 85% loan for that reason. Some banks have a higher interest rate for the part of the loan that is between 75% and 85% of the home's value. It is often called a stair step loan. But not all banks have this practice. If you qualify for a so-called first home loan, you can get the bank's best interest rate, even if you have borrowed almost to the hilt. Check finansportalen.no, renteradar.no or send the loan out to tender and check which banks extend the longest in terms of interest, even if you have a high level of leverage. Remember to state whether you are a member of a trade union or interest organisation. Several associations have membership agreements with banks that give low interest even for high borrowing.
Point 1 or 2: You lower the interest rate to 1.8%: New term amount: NOK 16,500.
Bargain! Why settle for 1.8% interest if you can borrow money at 1.5%? Not all banks lowered interest rates to the same extent for all customer groups last year. And not everyone sets up the rent the same amount in autumn for all groups. Some prioritized individual program customers, but others prioritized the youngest customers. The best interest rates are given to you who are members of professional organizations such as LO, Akademikerne and YS.
Check it out here: You lower the interest rate by 0.3 percentage points for a loan of NOK 4 million, you save NOK 12,000 in interest before tax this year!
You lower the interest rate to 1.5%. New term amount: NOK 16,000.
Run a stress test, and build your finances more robustly while saving money already today. Good luck!