Refinancing a mortgage means that you take out a new mortgage. With this new mortgage, you pay off your current mortgage in one go. Then you will be rid of your old mortgage debt. You can refinance your mortgage with your current mortgage lender. Or you switch to another mortgage lender. Your new mortgage will have new conditions and mortgage interest.
Why refinance your Dutch mortgage?
The main reasons to consider remortgaging your home are:
- Shortening or extending the loan term to match life changes
- Securing a lower interest rate to reduce monthly payments
- Switching from variable to fixed rates for stability
- Accessing home equity for renovations or investments
Costs and considerations of refinancing your mortgage
But, can you just refinance your mortgage? You can refinance your mortgage before its fixed-rate period ends or after it ends. In case of the first you have to pay a penalty:
Let’s assume you have a €400,000 mortgage with a 5% interest rate and remaining fixed-rate period of 5 years. You can repay every year a 10% of the mortgage amount without penalty. Now, the interest rates have dropped to 3%.
- First you will repay 10% of your mortgage without penalty: €40,000. The remaining amount will be €360,000.
- Second, calculate how much the bank will miss out due to stopping your fixed-rate mortgage. Subtract the market interest rate (3%) from your current interest rate (5%). This equals to 2% per year. Since your remaining fixed-period is 5 years the bank will loose 5 x 2% =10%. The penalty will be then about 10% of €360,000 = €36,000.
If your fixed-rate period has finished then you pay no penalty.
Of course there are more costs related to mortgage refinancing. Think of :
- Appraisal costs: €90-€800.
- Notary fees, mortgage advisor: €2000-€5000.
Many of these costs are tax deductible. Here is a detailed overview.
If you only want to lower your interest rate of your mortgage in the Netherlands with minimal hassle and costs read my article on tips of reducing your mortgage interest in the Netherlands.
When is the right time to refinance your mortgage?
It really depends on the type of mortgage you have and the current mortgage conditions. It also depends on how long you plan to stay in the house. Sometimes the additional costs are high enough that make the refinancing not interesting.
Refinancing usually makes sense when:
- Your fixed-rate period finishes soon.
- Interest market rates are way lower than your current mortgage.
- You plan to stay in your home long enough to recoup costs.
If in doubt, consult a mortgage advisor!
Until next time, stay savvy.
