In other words, loan conversion can be defined as loan restructuring, which is why there is both down and up conversion of your loan. A loan restructuring in practice means that you pay off your fixed-rate mortgage and then take out a loan of the same type. The reason for converting loans is that interest rates and rates on loans are constantly changing, which means that you can continuously borrow and redeem loans at different interest rates and rates. The idea of loan conversion is such that you can redeem your loan to one interest rate level and raise a new one to another interest rate level. Interest rates are central as you have the opportunity to both down and up your loan.
What does down conversion mean?
Whenever you downconvert your loan does this mean in practice that you reduce your interest costs with the purpose of your overall performance on the loan will be less. The method has its name due to the fact that you are repaying your loan to replace it with a cheaper loan. The disadvantage of the method – which you have to keep in mind – is that you increase your outstanding debt on the loan when converting down.
The reason why the outstanding debt increases is because you have expenses such as fees and foundation costs on your new loan. On top of that, you often pay off your original loan at rate 100, while you take out your new loan at less than rate 100. Therefore, a good guideline is that the interest rate must be at least two percentage points below your current interest rate before it can pay off to convert your loan. However, this depends to some extent on the size of your loan. Below is a simplified illustration of down conversion:
What is the difference between up and down loans?
Downconversion is characterized by the fact that you take out loans at a lower interest rate than your original loan. By upconversion record loans at higher interest rates. This is due to the fact that the bond yield on one’s loan decreases as the market interest rate rises. By raising a new loan with a higher interest rate, but in return a lower interest rate, the residual debt on your loan is reduced. It does so because you can redeem it at a lower rate than you recorded it at. However, you should note that the performance of your loan increases with upward conversion.
Thus, up-conversion is a lot more speculative than down-conversion. The two methods are often used in conjunction with each other, with the trick of loan conversion being to first convert your loan, then down convert. The great thing is that when you convert, you reduce your residual debt, while at subsequent downconversion you get a lower interest rate. However, it is a risky solution as it is never predictable of how interest rates will develop over time.
As can be seen from the above, loan conversion is only relevant for larger loans taken up by the bank or mortgage lenders. Therefore, you do not have to speculate on loan conversion when you borrow from us. We offer a 100% transparent loan. This is how you always have a full view of the costs associated with the loan. This is precisely one of the reasons why we have one of the best and cheapest loans on the market.