How long to fix the interest rate for?
The decision of whether or not to fix the interest rate, and for how long is perhaps one of the most difficult decisions when financing your home. You can opt for a fixed-rate period or variable interest. By fixing the mortgage interest rate, you are assured of stable monthly payments during an agreed period. With a variable interest rate, you are not protected against interest rate increases. You can however benefit from any future decreases in interest rates.
To summarize: this is not an overnight decision. The following 4 questions will help you to figure it out:
- Can I sustain a potential increase in charges, and do I want to?
At the end of your fixed interest rate period, the interest rate may have become a lot higher. Think about whether you can manage that increase in charges.
- How long do I expect to live in my first home?
Maybe you’ll pay off the mortgage within 5 years, and won’t take the interest with you to the next property. In that case, it’s a shame to pay a higher interest rate for a longer fixed-rate period.
- Am I going to borrow the maximum amount?
Do you want to borrow as much as possible based on your income? If so, take into account the key interest rate set by the AFM (Authority for the Financial Markets). This is the interest rate that lenders must utilize to calculate the maximum borrowing capacity. Our consultants can help you with this.
- Will I be paying off a lot extra?
Are you opting for a fixed-rate period, and paying off your mortgage in 10 years (with, for example, donations or a bonus)? If so, it doesn’t make sense to fix the interest rate for 20 years.
Read more about fixing the interest rate.
Mortgage structures for starters
For new mortgages, there are 2 structures that allow you to deduct mortgage interest from income tax: a linear and annuity repayment structure. The difference in a nutshell? With a linear mortgage, you’ll pay off more initially, and conversely, less with an annuity mortgage.
It is difficult to estimate which mortgage structure is ultimately cheaper. Usually, people who buy a home for the first time have a preference for annuity repayments, because of the lower monthly repayment costs in the first few years.
Read more about the difference between a linear and annuity repayment structure.