Fixed rate period: what is the sensible thing to do in my situation?
The decision whether or not to fix the interest rate, and if so, for which period of time, is perhaps the most difficult decision when financing your home. In this article, we have outlined the possibilities and the financial implications. Furthermore, we will help to get you started with four questions you can ask yourself in order to help you make the proper decision in regards to the fixed rate period.
Fixed interest rate
With a fixed mortgage interest rate, you are ensured of stable monthly costs during a fixed and agreed upon time period. Currently, the interest rates are historically low in The Netherlands. This provides the possibility to secure your interest rate for a long period of time at a relatively low percentage and ensures that you have affordable monthly costs at an acceptable interest rate. However, the disadvantage of securing the interest rate is that you cannot switch your mortgage to a new scheme with a lower interest rate or other conditions without having to pay a penalty.
Variable interest rate
With a variable interest rate, you are not protected against interest increases. However, you can benefit if future interest rates decrease. This can result in noticeable changes in your monthly costs. Will you be able to cope with the fluctuations in interest rates if the monthly costs (substantially) rise in the future? And how would you handle an increased interest rate?
It is sometimes suggested that a variable interest rate is cheaper than a fixed interest rate. This is usually the case when you finalise your mortgage and during the initial period. However, it remains to be seen if a variable interest rate is, on average, lower than a fixed interest rate over the entire mortgage term. There is no telling what the interest rate will do and what your monthly costs will be. It therefore depends on your attitude towards risk and your financial situation.
Ask yourself the following questions:
The longer your interest rate is fixed, the more it costs. You are, after all, buying more security. It is naturally a waste to pay unnecessary costs. Will it cost you more in the long run? What is the best course of action? When determining the best period, it might help to ask yourself these four questions:
1. Am I capable and do I want to bear a potential increase in costs?
A few months before your fixed interest rate term ends, you will receive a new proposal from your lender. This proposal includes new possible fixed interest rate periods with new corresponding interest rates. The interest rate may be higher than you are accustomed to paying. What will happen if the interest rate increases at the end of the determined fixed period? We will illustrate this with an example:
Assume that you can fix your interest rate at 2% for a period of 5 years and at 2.3% for a period of 10 years and opt for an annuity mortgage. With a mortgage of € 200,000 you will pay a gross amount of € 739.- per month if the interest rate is fixed for 5 years, compared to € 769.- if it is fixed for a period of 10 years.
Therefore, securing the interest rate for a period of 10 years costs you € 30.- more per month in the first 5 years, with a total amount of € 1800.- for the entire period. In addition, you will have repaid less capital. Logically, fixing the interest rate for 5 years is cheaper in the first five years. If the interest rate is still at the same level after 5 years or is lower, than you have saved € 1800.- by securing the interest rate for 5 years. However, if the interest rate increases, there is a risk that the monthly costs will rise substantially. In the abovementioned example the gross monthly costs will increase to € 1020.-, if the market interest rate is 5% in 5 years’ time. This amounts to a monthly increase of € 281.- .
Are you prepared to pay this potential increase? Even more important: can you cope with this potential increase financially?
In some cases it can be interesting to switch to a different mortgage provider that offers a better deal. You can always ask us to compare the proposal of your current mortgage lender with other lenders.
2. How long do I think I will live in the house?
If you are planning to live in your home for a long period of time, there is a significant chance that you will benefit from securing your interest rate for a longer period of time (based on an increasing interest rate). If you move or sell the house, the mortgage is always repaid at that point in time. If you sell your house after a period of 5 years with a fixed interest rate for a period of 20 years, you may have paid a higher interest rate than needed.
Often enough, an entirely new loan is taken out for a new house. However, in some cases you are allowed to transfer the interest rate conditions you had with your previous lender to the next house. This possibility is interesting if the interest rates have increased in the interim period. In order to transfer the interest rates, you have to stay with the same lender and might also have to borrow an additional amount required for a new mortgage from this lender. It remains to be seen if this mortgage lender is the best party to finance your next house. We can explain the rules for transferring the interest rate conditions in your situation in more detail.
3. Should I take out a loan for the maximum possible amount?
Do you wish to borrow as much money as possible based on your income? Then take the notional interest rate into consideration, which is determined by the AFM (Netherlands Authority for the Financial Markets). This is the interest rate that lenders have to take into account when calculating the maximum borrowing capacity. The current notional interest rate can be found on the on the site of the AFM.
However, for a fixed interest period of 10 years or longer, the actual interest rate may be used for calculations. As this interest rate may be significantly lower than the notional interest rate, you are able to borrow more. Our online calculation tool automatically takes this into account and gives you a good indication of your maximum borrowing capacity.
Do you still have insufficient borrowing capacity? One of our advisors can help you to find an optimal match between interest rate and borrowing capacity.
4. Will I make many additional principal payments?
If you fix your interest rate for a period of 10 years and you repay your mortgage in 10 years’ time (gifts, bonus, etc.), it is not sensible to secure your interest rate for a period of 20 years.
We will gladly assist you in choosing a fixed interest period and other choices you have to make when financing a house.
Would you like to know more about interest rates? Take a look at our mortgage proposal guide.