What determines mortgage interest rates
Take out a mortgage
In order to choose the best mortgage strategy, it is crucial to correctly assess the development of interest rates. The current yield curve is also a good decision aid for laypeople.
Predicting the development of interest rates reliably is just as difficult as predicting stock prices. The prices for shares are determined on the stock exchanges. Interest rate investments are also traded regularly on the money and capital markets.
There, market participants meet who want to borrow money for a certain period of time and those who want to make this money available. Together they agree on a price, the interest.
Money market for short terms
Transactions over short terms of up to one year are negotiated on the money market, those over longer terms on the capital market. As with stocks, the prices for interest rate transactions change continuously, depending on supply, demand and expectations of market participants for the future.
The interest rates for money market mortgages are based on the short-term interest rates controlled by the National Bank. If the National Bank lowers its key interest rate, short-term interest rates will generally also fall. The National Bank's interest rate policy depends largely on the economy, inflation and exchange rates.
Capital market for longer terms
The interest rates for fixed-rate mortgages are based on the long-term interest rates. The participants in the capital market try to predict the development of interest rates. If you anticipate a weaker economy or even a recession in the coming years, long-term interest rates will normally fall. Conversely, long-term interest rates rise as soon as there is signs of an economic recovery - possibly long before the National Bank raises the key rate again.
Anyone who does not know enough about economic issues to form their own opinion about the likely future development of interest rates is best guided by the current interest rate curve.
A steep yield curve means that the markets are assuming that interest rates will rise significantly in the coming years. Flat yield curves suggest that interest rates will tend to move sideways. With an inverse curve - that is, when the long maturities are cheaper than the short ones - market participants expect interest rates to fall.
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