Buying an own house is probably the biggest financial decision that most of us make. This is one of the reasons why previously I have dedicated a few articles in order to see whether renting or buying is the better option under specific circumstances. I invite you to check the whole series for details, but in a nutshell, if the price of the property is less than 20 times the annual rental fee, there is a low interest rate environment and you are planning to keep the place for more than just a couple of years, buying is most likely the better option.
The current market in the Netherlands seem to meet the above conditions, even though North Holland and Utrecht is getting quite pricey these days. Looking back in the past, we can definitely say that 1-2-3 years ago it was very difficult to make a bad purchase.
Buying our house 2 years ago has contributed a lot to the fact that our net worth has increased over EUR 200k. Also, without this we would not have been able to get an investment mortgage with very favorable conditions.
Even if you have bought a property a few years ago with favorable conditions and below the current market value, it does not necessarily mean that you should just lay back and relax. Especially if you got your mortgage with little or no down payment.
In many countries a minimum percentage of down payment is required in order to get a mortgage. In the Netherlands there is no such rule. You can even get a mortgage up to 101% of the purchase price. In many cases this can be quite dangerous, but if your financial situation allows, and you buy a property with a price tag way below your maximum allowed limit, this might be even a good option in the current low interest rate environment.
Of course the banks want to make sure that if you fail to pay your mortgage, they still can safely sell the property and get their money. This is why they determine risk classes. These risk classes can vary from bank to bank, but typically the followings apply:
- Your outstanding mortgage is over 80/85% of the price of your property
- Your outstanding mortgage is between 60/65% and 80/85% of the price of your property
- Your outstanding mortgage is below 60/65% of the price of your property
- A special category is when you fall under the National Mortgage Guarantee (NHG). Here special conditions apply, for example the purchase price cannot be above EUR 245k
I attach current overview on the offers for 10 year fixed mortgages. American readers are allowed to get jealous 🙂
Once you get a mortgage, it can be properly calculated when your outstanding liability will fall under a new category. For example if you get a 100% annuity mortgage with 2.4% interest rate, it takes 75 months in order to fall under the below 85% category and 97 months in order to fall under 80%. If the property price keeps being the same…
… but currently it is increasing:
As the price of your property is increasing, the amount of your outstanding mortgage represents less and less percent of the value of your home. This means that if you have taken a mortgage on the whole or nearly whole purchase price about 2 years ago, you will most likely fall under the 85% (or maybe even the 80%) threshold. In such case you are entitled to a mortgage increase decrease right now, while otherwise you would need to wait 4-6 additional years based on the original plan.
How much money does it mean for you?
Taking the example of 2.4% starting interest rate on a EUR 300,000 mortgage taken 2 years ago and a 15% price increase since then, you would need to pay EUR 27,088 in interest if you do nothing. In case you inform your bank about the new property price and they adjust the interest rate by 0.5% (this is based on your original interest rate table, but you can expect something around this range), during the same amount of time, you will only pay EUR 21,358 interest. This means EUR 5,730 saving!
In addition your monthly payments will be reduced, furthermore due to the lower interest rate more amount will go against reducing your principal liability.
Is it free? Yes, although terms and conditions might differ for each mortgage providers. Nevertheless you need to pay an authorized company (taxateur) who will prepare an official valuation report (taxatierapport). This has a fee around EUR 300.
Everyone’s situation in unique. The exact numbers depend highly on the initial mortgage amount you took, your interest rate table, the property price increase in your area etc. Nevertheless as a general rule of thumb we can say that if you have a non NHG mortgage that you got with little or no down payment 1-4 years ago, it definitely worth a calculation as you might save thousands.
Have you successfully reduced your mortgage interest with this method? Please share your story! Do you need help with the calculation? I’m happy to assist if you have any questions!
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Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on financial independence and early retirement.