Refinancing your mortgage can be a great way to reduce your mortgage costs, especially in times of low interest rates. But is it always a good idea to refinance your mortgage and when are the best times to consider it?
What is mortgage refinancing and how do you do it?
“Mortgage refinancing is basically the process of re-mortgaging your property”, explains Henk van Seijen from Finsens. This new mortgage repays your existing mortgage in full and you start making monthly payments on your new mortgage. If you have bought a home in the Netherlands with a mortgage, refinancing your mortgage could make financial sense since Dutch interest rates are currently very low. “But there are important implications besides the low interest rate to consider and it is wise to seek advice first”, warns Henk.
You can refinance your Dutch mortgage through your existing loan provider or you can switch providers. It could be wise to shop around and compare mortgage rates. Independent mortgage advisors like Finsens have access to all lenders in the Netherlands and are able to compare rates and conditions for you in order to get the best deal.
Benefits of refinancing your Dutch mortgage
Lower monthly payments
If you have a Dutch mortgage with a fixed rate interest rate, refinancing your mortgage can make sense if current interest rates are lower than the rate you’re paying. Interest rates in the Netherlands are currently low, at around 2.1 – 2.4 percent on a 10-year fixed interest rate and around 2.6 – 2.9 percent on a 15-year fixed interest rate. A further discount on the interest rate may apply thanks to a lower loan-to-value.
“Reducing your interest will reduce your monthly payments. But you need to take into consideration the costs of refinancing your Dutch mortgage (see below section) as well as how long you feel you will stay in an own home”, advises Henk. “If you sell within a few years of mortgage refinancing, the costs may exceed the savings of a lower rate.” However, if you are allowed to transfer the mortgage to a new property, a sale within a couple of years will not lower the benefit of the refinancing.
Reducing the term of your mortgage
If you take advantage of lower interest rates and refinance your Dutch mortgage, you could opt to keep your monthly payments the same and instead reduce the length of time you’ll be paying your mortgage. Henk explains: “For example, a 30 year mortgage could be paid off in 20 years. But you need to check the terms with your lender regarding paying off your mortgage early, as extra costs may be involved. Most banks allow annual repayment of 10% of the original mortgage without a fine.”
Transferring to a more secure mortgage
If you have a mortgage with a variable interest rate, where your interest rate fluctuates according to, for example, the Euribor rate, you could take advantage of low interest rates by transferring to a fixed-rate mortgage and avoid the risk of payments rising in the future.
Accessing equity on your home
Another reason to consider refinancing, according to Henk: “A less savings-oriented move, but refinancing your mortgage in the Netherlands is an option if you want to take out some equity from your property to cover a major expense such as home improvements – or a lower monthly income.”
Disadvantages of refinancing your Dutch mortgage
Refinancing your mortgage costs money, so you’ll need to work out how much these costs will offset any savings you might make from the lower interest rate. Exact fees vary from lender to lender but can be in excess of three times your annual interest costs. They may include:
- Intermediary fees
- Compensation to your existing lender for loss of interest
- Notary fees, if you switch lenders
It can increase debt
“If you refinance your mortgage to tap into home equity, it can be a slippery slope to ever-increasing debt, so you should make sure that you can cope with the extra financial responsibility”, warns Henk.
What to do when you have some years left in your current fixed term?
In case you still have several years to go with your current fixed interest rate, the fine on repayment will be too large to benefit from a lower rate. “Luckily,” says Henk, “there is a still a way to take advantage of the low interest rate. Most banks provide the possibility to average your current interest rate with the market rate for a new fixed term. This way, you don’t have the full advantage of the low market rate; however, you save on the costs of refinancing at another lender and your current interest cost will be lowered.”
When to refinance your Dutch mortgage
In brief, these are the reasons why refinancing your mortgage could prove advantageous:
- When interest rates are low enough that the money you can save through reduced payments outstrips the costs of refinancing your mortgage
- If you plan to stay in an own home for a long period of time (or buy a new home within a couple of years)
- If you want to switch to a more secure fixed-rate interest mortgage when rates are low