Falling interest rates – what do they mean for loans, savings and investments?

How will the policy rate cut in June affect my home loan costs?

The expectations of rate cuts are already reflected in home loan reference rates, such as the 3-month and 12-month Euribor rates. 

For example, the 12-month Euribor has already dropped to 3.7% from above 4% in late last year. This is because the level of the 12-month Euribor is based on where the market expects the policy rate to be in 12 months.

For those who have a home loan, a fall in the interest rates will become tangible on their interest rate adjustment date, which is once a year if your reference rate is the 12-month Euribor. If your interest rate adjustment date is approaching now, the reference rate in your home loan will fall by 0.2 percentage points, as the 12-month Euribor is now that much lower than a year ago. If your interest rate adjustment date is towards the end of the year, the reference rate may by then have fallen close to 1 percentage point. 

For example, if you have a home loan of 200,000 euros, are repaying it in equal payments (annuity) and the remaining loan period is 20 years, a reference rate that is 1 percentage point lower means a decrease of about 100 euros in your monthly loan payment. 

When will my variable rate be adjusted?

The level of your reference rate will always be adjusted on the interest rate adjustment date, which depends on the date on which you have drawn down the loan. You can check the next interest rate adjustment date of your home loan in Nordea Mobile or Netbank under the loan’s details. 

Which reference rate should I choose?

It depends on your needs and goals which reference rate is the best for you. While one may want to plan their finances exactly, the other may tolerate fluctuations well. You should therefore base your reference rate selection on your view of how the interest rates will behave. 

If you tolerate the fluctuations related to interest rate movements well, you can choose a short reference rate, which tracks the market at a fast cycle. If, however, you want to know your future interest expenses beforehand and plan your finances exactly, you should choose a reference rate that remains as stable as possible. In that case, the reference rate should either fluctuate only little or at a slow cycle.

Even if you have enough flexibility in your finances to adapt to rising interest rates, it’s rarely sustainable to spend all your financial leeway on your home. In most European countries the most popular reference rate in home loans is a fixed rate, which makes the household’s monthly expenses more predictable. When you’re choosing the reference rate, think about what is important to you and ensure that you have enough money to cater for the important things in different interest rate scenarios.

One option is to divide your loan into two parts, one with a variable rate and the other with a fixed rate. By doing so, you will know the monthly loan payment of the part with the fixed rate in advance but still be able to benefit from falling interest rates. If you change homes, you can always port a fixed-rate loan.

How certain is it that the rates will continue to fall? 

It’s impossible to predict the rate movements for certain. We have for long held the view that the 12-month Euribor will be around 3% at the end of 2024 and continue to fall to about 2.75% in the spring of 2025.

Rate movements are, however, dependent on how the eurozone economy and inflation perform, so our interest rate forecast is subject to a high degree of uncertainty. 

If the economy performs better and inflation is higher than expected, the interest rates may fall slower than predicted. On the other hand, if inflation remains subdued and economic growth is slow, the interest rates may fall quicker than predicted. In any case, we don’t believe that the rates will drop back to zero. 

Is this a good time to buy an interest rate hedge if I don’t have one yet?

It’s likely that the interest rates will fall, but we don’t know how they will move in the long term. With our interest rate hedging products you will always know in advance how much interest you need to pay. You may want to hedge your home loan with an interest rate collar, interest rate cap or fixed interest rate.

Read more about the hedging options and a fixed rate

What are the benefits of changing the reference rate?

You should choose the reference rate based on your circumstances, and you shouldn’t change it very often, as you will have to pay a fee. It is perfectly possible to change the reference rate, but it will not provide a quick relief to your monthly loan costs.

In home loans the loan period is typically long, 23 years on average. The moment for changing the reference rate is short compared to the entire loan period. So when you’re assessing the interest expenses of your loan, it’s more essential to consider where interest rates will be in a few years rather than in a few weeks or months.

How does Nordea Prime differ from the other reference rates?

Nordea Prime is stabler than the market rates. Its level changes at a slower pace than the Euribor rates and tracks them at a small delay. Nordea Prime is currently 3.5%. We will always announce any changes to it two weeks in advance.

You can apply for a change to the reference rate from the 12-month Euribor to Nordea Prime or vice versa by filling in the appropriate form in Nordea Mobile or Netbank. 

Read more about Nordea Prime.

Will the housing market start to pick up with the falling interest rates? 

Home prices often rise when interest rates fall. 

The housing market has been subdued for almost two years, as higher interest rates led to a decline in the number of sold homes and in home prices. The prices of old dwellings in housing companies have declined 11.5% since mid-2022. The number of sold homes has been about 30% lower than normal. 

We already saw a small uptick in the housing market in April when the number of sold old dwellings grew year-on-year. Nevertheless, the housing market remains muted, but it is expected to pick up again with the falling interest rates. The decline in the prices is also expected to stop. 

Another reason for the slow housing market is that many buyers are waiting for their own home to sell first. 

Read more about changing homes.

Should I buy now or wait for the interest rates to fall lower?

The right time to buy a new home is when you need it. This may be a sensible time to buy a home because home prices are on average lower than they have been for two years. 

If you have financed your home with a loan, you have paid slightly higher costs due to the high interest rates than if you had rented your home. But when the interest rates fall, your loan costs will also decline. 

When you’re thinking about buying a home or changing homes, you should consider both the current and future costs. When you buy a home, you will build your wealth when you repay the loan. This does not happen if you pay a rent to someone else. 

Read more about the differences between owning and renting a home.

How will the falling interest rates affect my savings in an account?

Nordea’s analysts estimate that interest rates will fall moderately this year. If interest rates fall to about 3%, this will not have a big impact on savings deposited in an account. If interest rates continue to fall in 2025, we might see a more significant impact.

As interest rates are expected to fall, banks are currently offering higher interest rates for short-term deposits than for long-term deposits. For example, a 3-month deposit would earn you higher annual interest at the moment than a 12-month deposit. On the other hand, you get the same interest rate for the entire period for the longer-term deposit even if interest rates fall further.

You should always save money for a rainy day in a savings account regardless of whether interest rates fall. When you are satisfied with your buffer, it’s time to also look into investment funds.

How will the falling interest rates affect my holdings in investment funds?

It’s always best to take a long-term approach to investing in funds, and invest over several years. You shouldn’t give up on your investment plan or regular monthly saving – you can always save and invest in a way that suits your needs and risk profile.

Lower interest rates impact various investment funds in different ways. A decline in short-term interest rates is most visible with money market funds because the return they provide rises or falls with the policy rates.

Bond funds are especially affected by interest rate movements because their return depends on the general interest rate level. As higher rates mean lower returns on bond funds and vice versa, a decline in interest rates may offer higher return potential for those investing in bond funds.

Bond funds can be divided into short-term, medium-term and long-term funds. When interest rates start to fall, this will first be reflected in the returns of long-term bond funds, whereas the expected rate cuts are not yet affecting short-term interest rates. Long-term interest rates are more stable and predictable, while short-term interest rates may fall faster.

How will the falling interest rates affect my monthly saving?

Regular saving is always a good idea. We recommend that you stick to your saving and investment plan even when the markets are volatile. If you want to discuss your situation or update your plan, you can book a free meeting with one of our experts. Read more and book a meeting to get investment advice

How will the falling interest rates affect my equity investments?

The equity market has benefitted more from the recent improvement in the outlook for the economy than the interest rate environment. This means that the falling rates will not necessarily affect equity investments that much. 

According to current estimates, economic growth is picking up slowly in Europe, too, allowing the big picture to remain favourable for equity investments. 

Some companies may be more affected by the interest rate decisions made by the central banks but investors should take a long-term approach and look beyond individual events. It’s important to make an investment plan and stick to it – especially in times of market volatility.