Blog - How to save on your mortgage

Added on Friday, 2016-09-30 18:06 CEST in category Netherlands
My wife and I recently restructured our mortgage in the Netherlands, and had our apartment revalued to get to a lower risk class. This saves us hundreds of euros per month, and maybe so it can for you! ;)

Getting a mortgage

About three years ago my wife and I moved to the Netherlands, and shortly thereafter, in March 2014, bought our very own apartment. We took out a mortgage at ABN Amro bank and fixed our interest rate for five years at 3.9%, which seemed like a reasonable term and rate at the time.

At the time we had no idea what the market would do, or that it did anything at all, how mortgage rates worked exactly, or how they changed. We paid our monthly payment, and that was that, until recently a news article caught my eye: it said mortgage interest rates were at an all-time low, and in many cases it pays off to restructure your mortgage.

Restructuring a mortgage

When we fixed our interest rate, we agreed with the bank to keep paying the same interest rate for five years, no matter what the floating (current) interest rate would be. This can be profitable if interest rates are going up, or not so much if they go down, which they did. A lot… After I read the news article I checked the current interest rate, and if fixed for five years it was 2.35%. This was over 1.5% point lower than we were paying. If only we could switch to this lower rate…

Switching is in fact possible, but it comes at a price: the bank would be missing out on future interest paid during the remainder of our fixed interest term, and this interest foregone has to be compensated. There are two ways of doing this.

Paying a one-off fine

Technically not the entire interest foregone has to be compensated, but only a part. This has to do with:
  • most banks allowing you to pay off an additional 10% of the body per year;
  • interest the bank receives over the fine;
  • probably something else too :)
In our case, the fine ended up being about 2/3 of the actual interest foregone, which seemed quite reasonable. Additionally, the fine is tax-deductible, so we'll be getting a large part of it back next year.

Combining the old and new interest rates

It has recently become possible in the Netherlands to combine your old and new interest rate (Dutch: rentemiddeling). The bank calculates their interest foregone, increases the current interest rate accordingly, and then (for some reason) adds a 0.2% point surcharge. This frees you from having to pay a (usually) very hefty one-off fine, but in the long run is about twice as expensive, and wouldn't even break even during the remainder of our fixed interest term…

Switching rates

We had built up a bit of a buffer, which proved just enough to be able to pay the fine up front. So switching was possible and profitable for us, but to what new rate? It seemed tempting to fix our new interest rate for 10 years or more, given how low it already was. But the forecast was for long-term mortgage interest rates to become even lower, so ideally we'd fix it for a year or so, and fix it again for a long time only after interest rates have hit their very low.

It turns out this is possible by fixing the interest rate for 0+2 years. This means the interest rate is fixed for two years, but during the last two years of those two years (so straightaway, if you'd like to, or at any point during those two years) you can fix it again at the then-current rate.

Coincidentally, when we switched in July our bank had just severely lowered their interest rate from 2.35% to 1.64% specifically for 0+2 years (and not for other terms). After taking into account my wife's employer discount of 0.2% point, we had our interest rate fixed at 1.44% :)

Finding rock bottom

Since July the forecast has stayed the same: mortgage interest rates will keep going down. And indeed, since July the interest rate at our bank when fixed for 10 years has gone down from 2.63% to 2.29%!

It's very tricky to find the exact rock bottom, which depends on many, many factors, but some things that help are: So far everything indicates an even lower mortgage interest rate, so we wait :)

Lower your risk class

But there is more! With most banks, the amount of mortgage interest you pay depends on your loan-to-value (LTV) ratio, which is the ratio between the mortgage and the face value of your asset (house, apartment, other real estate). The higher this ratio, the more risk the bank runs when they have to foreclose, and subsequently the more interest you pay.

In our case, when we took our mortgage, our LTV ratio was slightly over 100%, which is the highest risk class. Over the last few years we paid off part of the body, and last month our LTV ratio was about 92%. Only when we'd reach 85%, however, would our mortgage fall under a lower risk class, which yields a 0.5% point interest rate decrease!

By paying off as usual we'd reach an LTV ratio of 85% somewhere end of 2018, but there are a few ways to reach this lower risk class faster:
  • by paying off more of the body;
  • by switching to a different bank (different banks have different risk classes);
  • by proving the face value has increased.
(Btw., the Dutch NHG (Dutch only) is a different risk class in and of itself.)

Since real estate prices in our province of South-Holland had gone up about 10% on average since we bought our apartment, we figured our LTV ratio should go down by that much as well. In order to prove this to the bank, however, we needed to have our apartment revalued.

That process turned out to be quite simple: the bank advised an independent party to perform the valuation, a representative of which came by to our apartment and checked some documentation about the apartment building, the homeowner assocation, etc. A few days later the evaluation was in, and indeed: our apartment had risen in price ~10% since we bought it in March 2014.

When our bank had received the valuation, they promptly dropped our interest rate by 0.5% point to a whopping 0.94%!

I hope some of you will find this helpful, and can pay less as well :)