Anyone who took out an expensive mortgage years ago now looks at the low interest rates full of jealousy. But luckily there are solutions so that people with a high mortgage interest can benefit from low interest. You can break open your mortgage and refinance it. Banks often demand a fine as compensation. Which you can pay in installments – via interest mediation – or in one go. But what is smarter?
Paying penalty interest in installments
The excess fine can be paid in installments only through interest rate averaging. The fine that you pay for prematurely opening up your mortgage is then distributed over the new fixed-rate period. There is nothing wrong with that. But unfortunately this amount is often higher than when you pay in one go.
On top of that, with interest averaging, the part of your mortgage that you can repay without penalty will sometimes lapse.
That makes the fine even higher. Some banks also charge substantial interest surcharges. Allegedly to cover the costs and risks. But I think it is mainly opaque costs that cause a much too expensive service.
Reprinting your mortgage and paying the penalty interest at the same time is always cheaper than paying penalty interest in installments.
You only pay the fine, without surcharges, and you immediately benefit from the new low interest rate. This is not the case with interest averaging. Averaging means that your mortgage interest is averaged with the current interest. That is always more than the minimum interest.
Finance penalty interest
I know that many people cannot pay the penalty interest in one go. In that case you can also opt for a loan to finance the penalty interest. I see customers passing by every week who choose to borrow money for this reason.
Finance penalty interest costs with loan
To illustrate an example from last week: one of my clients has reduced his mortgage costs from € 1,800 to € 800 per month by taking over his mortgage. He financed the penalty interest with a Personal Loan that he repays in five years and costs him € 300 per month.
Compared to his old mortgage, he will save € 700 per month for the next five years and then even € 1,000. A great saving that was arranged that way. And who knows, you too can save a lot of money and finance your penalty interest in this way. So compare the options and at least do not opt blindly for interest mediation .
Update 30 June 2016: Consumer Association advice on interest averaging
Not only are we critical of interest-rate averaging. The consumer association also advises not to opt for this expensive service. They will express this advice in a news release on 30 June. Because BAS and Find Loan are offering interest-rate averaging as of 1 July, the consumer association feels compelled to warn consumers about this.
Research by the consumer association shows that interest-rate averaging is too expensive and in this way banks burden homeowners with higher costs for a longer period of time.