The mortgage interest consists of a base rate and a risk surcharge. The amount of the risk surcharge depends on the size of your mortgage in relation to the property value. Based on this, the lender assigns you to a certain risk category. Discover how it works.

What exactly is a mortgage risk category?

The ratio between the amount of your mortgage debt and the property’s value (the loan-to-value) determines which risk category you fall into. Do you have a high mortgage compared to the property value? Then, you end up in a higher-risk category. The lender faces more risk. Conversely, a low mortgage compared to the property value places you in a lower risk category because there’s little risk for the lender.

Rate surcharges and risk categories of your mortgage

How to calculate the risk category of a mortgage

You can easily calculate which risk category you fall into yourself. We’ll guide you. First, you need to know your exact loan-to-value ratio. This is calculated by dividing the mortgage amount by the property value. Then multiply it by 100%.

A calculation example:

Your mortgage amount is €450,000
Your property value is €500,000
The mortgage amount and property value ratio is 450,000 / 500,000 x 100 = 90%.

The amount of interest surcharge you pay

Once you know the ratio, you can check the lender’s interest rate tables to see which risk category you fall into. Some banks have 3 risk categories, and others have more than 10. Banks determine how they classify risks themselves. At the start of your fixed-rate period, the lender decides which risk categories and associated interest rates apply to you.

An example of how this classification might look for mortgages:

  • 85% – 100% of the property value: 0.5% higher interest
  • 70% – 85% of the property value: 0.35% higher interest
  • 55% – 70% of the property value: 0.2% higher interest
  • Mortgage for 55% or less of the property value: no interest surcharge

In our example, you fall into the highest-risk category and have an interest surcharge of 0.5% on top of your base rate.

It’s good to know that if you have a mortgage with NHG (National Mortgage Guarantee), there’s always a special (low) risk category. The lender faces less risk. The NHG guarantee fund covers any residual debt, ensuring the lender always gets their money back. You cannot adjust this risk category.

When you fall into a lower-risk category

If the ratio between your mortgage debt and the property value changes in your favour, the risk surcharge can decrease. You can then fall into a lower-risk category. This happens when:

  • You (extra) repay your mortgage
  • The value of your house increases

Have you made a significant repayment, increased your home’s value, or have you been repaying for some time? Then, the risk surcharge might go down. Or even be eliminated. Even if the interest is fixed for a longer period, you will then immediately pay less mortgage interest.

How you actually fall into a lower-risk category

Fortunately, more and more lenders automatically adjust the risk surcharge if you have repaid enough. Then, you don’t need to do anything, but it’s always a good idea to check with your mortgage provider. Has your property value increased? Often, you need to demonstrate this yourself, for example, with an appraisal report.

It’s good to know that with some lenders, an appraisal report is always required if you adjust your risk category. Consider the costs of an appraisal report against the better interest rate you could get.

How much money does a lower-risk category save?

If your risk surcharge can decrease and you fall into a lower-risk category, you might save hundreds of euros annually. How much you save exactly depends on various points:

  • How high your outstanding mortgage is
  • How much interest discount you get due to the lower-risk category
  • How long your mortgage runs and how long your interest rate is fixed

Questions about your risk category?

It varies by lender how you can fall into a lower risk category. With some, it happens automatically, but not with all. Sometimes, a relatively small extra repayment can ensure you fall into a lower-risk category, immediately saving you money. Feel free to contact one of our mortgage advisors without obligation if you have questions about risk categories.

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