Choosing an ARM - Adjustable-Rate Mortgage
1. Preferred size and stability of your monthly loan re-payments
Normally, the interest rate of ARMs funded by 1-year bonds will be lower than the interest rate of ARMs funded by 2-year bonds, which again will be lower than that of ARMs funded by 3-year bonds. In return, the interest rates of ARMs funded by 2-year and 3-year bonds are adjusted every second and third year, respectively, compared with the annual interest rate adjustment of ARMs funded by 1-year bonds. By choosing ARMs funded by 2-year or 3-year bonds, your interest payments will be fixed over a longer period, but you also have to pay a higher interest rate.
The interest rates of ARMs funded by 1-year, 2-year and 3-year bonds are generally determined on the basis of market expectations of future interest rate trends. If you believe that interest rates will develop differently than market consensus, this may also be reflected in your choice of ARM.
2. Special future events that may influence your choice of mortgage
Compared with ARMs funded by 1-year bonds, ARMs funded by 2-year and 3-year bonds are generally less "flexible". Prepayment of such ARMs may therefore be more expensive in the periods between the agreed interest rate adjustment dates.
If you want to prepay an ARM funded by 2-year or 3-year bonds between the agreed interest rate adjustment dates, you may have to prepay the debt outstanding at a price above par (100) if interest rates decline. But if interest rates have increased, you have to pay tax on the capital gain if you are liable to pay tax in Denmark, unless the prepayment is in connection with a sale of your property.
Return to article on interest rate adjustment
If you have questions in connection with a forthcoming interest rate adjustment of ARMs in euro, please do not hesitate to contact us. We will advise you on what is best for you.