Most people in the Netherlands take a mortgage for 30 years and fix the rate of at least part of the loan. It is common for people to take on fixed-term rates of 10 years or more – unlike in other countries – and especially if it is cheap to borrow money.
So, when taking out a mortgage, one of the key decisions you’ll face is choosing the length of your fixed interest period. This period determines how long your mortgage interest rate will remain unchanged, providing you with predictable monthly payments. While this certainty is reassuring, longer fixed interest periods often come with higher interest rates. So, how do you decide on the best option for you?
It all comes down to the kind of person you are and how much mortgage you need or want. No one can predict the future so it is impossible to say what the interest rate will be in a few weeks, months or years. (That said, economists do not predict another situation where the lending rate between banks falls below zero as it did during the coronavirus pandemic). Here are five tips to help you choose the best fixed interest rate.
A short fixed-rate period offers the lowest interest and most flexibility
If you’re focused solely on the mortgage interest rate and want the absolute lowest rate for your mortgage, then the short fixed-rate periods are the best option. A short fixed-rate will also mean you have to choose a new fixed-rate relatively soon. This might be to your advantage if you believe interest rates will drop. A longer fixed-rate period will generally come with a higher rate.
A long fixed-rate period offers certainty on mortgage payments
While a shorter fixed-rate period can offer the lowest interest rates, it comes with the risk of uncertainty once it ends. If mortgage rates rise, you could find yourself facing higher monthly payments instead of lower ones. This makes a short fixed-rate period a suitable option only if you’re financially prepared for a potential increase in your payments.
If you’d rather avoid this uncertainty and want more stability in your monthly costs, a longer fixed-rate period might be the right choice for you. Options like 10 or 20 years provide greater peace of mind, ensuring your payments stay predictable for a longer period of time.
Long fixed-rate period means limited flexibility
While a long fixed-rate period offers stability in your monthly payments, it also comes with a significant downside—limited flexibility. If you decide to make changes to your mortgage during the fixed period, such as refinancing, adjusting your fixed-rate term, or switching mortgage types, you may face a penalty for breaking the agreement.
This is something to carefully consider before locking in a long fixed-rate period. If you anticipate needing more flexibility in the future, it might be worth weighing the potential costs of making changes during your fixed term. If you expect your income to go up, you should also check how much money you can overpay to reduce the capital loan during a long fixed rate: you pay be able to repay 10% of the initial loan each year without additional penalties.
A fixed-rate period of 10 years (plus) means you can borrow more
When applying for a mortgage, lenders calculate how much you can responsibly borrow based on your income, expenses, and existing debts, according to national norms published by the Nibud. A higher interest rate reduces the amount available for repayment, meaning you can borrow less.
For fixed-rate periods of 10 years or longer, lenders can use the actual interest rate you’ll pay in their calculations, rather than the higher “stress test” rate of 5% used for shorter terms. This means that if rates are currently lower than 5%, you may be able to borrow more with a longer fixed-rate period.
Seek advice
Always consult with your mortgage advisor and consider asking the advice of your financial advisor or accountant. They can provide insights into future interest rate trends and help you navigate the best options based on your personal situation.
Should you mention that people should not take the hypotheekrenteaftrek for granted when making decisions about future loan commitments?