Refinancing your mortgage can generate a lot of advantages. Lower your monthly costs or free up capital gain. In this blog, we will explain exactly how refinancing your mortgage works and how a good advisor can be of assistance.
Refinance your mortgage and save on your monthly costs.
By changing your mortgage (‘refinancing’), you can benefit from the low interest rate. The interest rate has decreased considerably in the past years. You can reduce your montly costs, free up money for a renovation or for entertainment purposes. Many people can save hundreds of euros each month by refinancing their mortgage. We will explain how this works.
Every month, you pay a certain amount to the bank to pay off your mortgage. When applying for a mortgage, you get a loan from the bank. Interest and often a repayment are paid on this amount, accumulating to your monthly costs. Your mortgage can also (partly) be free of repayments. This means you only have to pay interest to the bank.
The amount of interest you pay depends on the interest rate, which has been agreed with the bank when applying for your mortgage.
Your monthly costs consists of interest on the amount you borrowed and usually a repayment. The less interest you pay, the lower your monthly costs.
Quite often, a lot more is possible than you initially thought
The interest you pay is determined by different factors. Partly by the risk taken by the bank and partly by the market interest rate. The higher the market interest rate, the higher the mortgage interest rate. The bank also takes into account the risk it takes when accepting you as its customer. Are you married, have you got a permanent contract, which percentage of the value of your house would you like to borrow etc. The higher the risk and the market interest rate, the higher the mortgage interest rate.
The market interest rate has fallen considerably in the past years. You notice this on your savings account, as the interest rate on your savings is really low. This is very unfortunate, but you can also benefit from it. Due to the lower market interest rate, the mortgage interest rate has also fallen. In 2010 you paid approximately 6% interest, compared to approximately 1.5% at present. Applying for a mortgage in 2021 means you often only pay a quarter of the interest rate you paid in 2010.
Often, the interest rate is fixed for a certain period of time, we call this the fixed interest period. This usually covers 10 or 20 years. During this period, you will pay the interest rate as agreed with the bank. This means the bank is lucky when interest rates fall during this period. However, if the interest rates increase – you are the lucky one. After the fixed interest period has passed, you can enter a new agreement with the bank. It is also possible to change your interest rate during the fixed interest period, however, you will need to pay a compensation fee to the bank.
The bank is due a penalty interest fee if you refinance your mortgage before your fixed interest period has expired. You have signed a contract with the bank for a certain period, and the bank has calculated a certain income over that period. The bank won’t be happy missing out on this revenue, hence the reason you need to ‘pay off’ this loss in order to change your contract. The money you need to pay is a so-called penalty interest fee.
Luckily it is quite often possible to include this penalty in your new mortgage. You therefore don’t have to pay a lump sum. A large amount of the penalty is tax deductable as the interest on your mortgage is/was most likely also tax deductable. The net amount you pay on your penalty interest fee is often less than the gross remuneration.
When refinancing a property, quite often there will be capital gains on the house. This means the value of the house is more than the value of your mortgage. This can be the case if you have paid off part of your mortgage, if the value of your property has increased or a combination of both. This capital gain can be used to cover the costs of refinancing your mortgage. A capital gain on your property also leads to a reduction of risk for the bank and therefore a lower interest rate.
Refinancing your mortgage also involves certain costs. The notary has to draft a new deed, an estate agent needs to value your property and you need to pay a consultancy fee to your bank or consultant (Vixx). You can decide to pay these costs immediately or to (partly) include them in your new mortgage. Some of these costs are tax deductable. The best solution depends on your personal situation. Vixx can tell you exactly which solution would suit you best.
Once it has been decided that refinancing is the best solution, it is time to choose a new mortgage. Which mortgage suits you best depends on your wishes and the terms and conditions of various banks. There are many mortgages to choose from. All these mortgages have different terms and conditions. For example, the interest rate, linear or annuity, the fixed interest period, whether or not you will be paying off your mortgage etc.
A new mortgage comes with plenty of options. For example, you can choose to only pay of interest on part of your mortgage, take out part of the capital gain to finance a renovation project or a gift, or you can reduce the maturity of your mortgage. Your wishes and personal situation determine which option suits you best. An experienced consultant can help you find the best deal for your situation.
You can save on your monthly costs by reducing your mortgage. These savings can run up to hundreds of euros per month. There are some costs involved when refinancing your mortgage. Often, you can include these costs in your new mortgage. If your fixed interest period hasn’t expired yet, you owe the bank a penalty interest fee. This can also be included in your mortgage, preventing you from having to pay a large sum and using your savings account for this. A consultant can help you decide which options suits you best.
The Vixx Mortgage Refinancing Check gives insight in whether you can save money, before incurring any expenses. We can take care of the entire process once it has been decided that you can save on your mortgage. We compare different mortgage providers to find the best deal for you. You will know if you can save any money, before incurring any expenses and you won’t get any surprises. Refinancing your mortgage? Vixx takes care of it.
Curious if refinancing your mortgage is an interesting option? Our first meeting is always free of charge and non-binding!
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