Pay attention! Borrowing money, costs money

A mortgage is often not seen as a form of credit, but a mortgage is indeed a form of borrowing. A mortgage is a loan to pay for your house. The home that you buy with the money is the collateral for this mortgage loan.

When you take out a mortgage, you are of course always looking for the cheapest. The mortgage interest is an important factor in the feeling of a mortgage loan. What should you pay attention to when taking out such a loan for your home and how do you find the mortgage with the lowest mortgage interest rate?

How does a mortgage work?

If you want to buy a house, but do not have enough money to pay off the entire purchase price at once, you can take out a mortgage. With this loan you can pay for the house. As with all other types of loans, you must repay this borrowed amount. Including interest. This interest to be paid is called the mortgage interest. This is a percentage that you pay monthly on the amount to be repaid.

Pay off a mortgage

Just like a revolving credit or a personal loan, a mortgage also has a term; the period in which you must repay the entire amount to the provider of the mortgage. In many cases this is a bank. In the case of a mortgage loan, the term is usually thirty years. This means that you pay a monthly amount for thirty years, including the interest, so that you are 'debt-free' at the end of the term. However, there are other ways to pay off the mortgage on your home.

1. Selling your home

When you sell a home, you receive money for it. With the money you receive for this sale, you can pay off the outstanding debt amount on your mortgage loan. When you sell the house for a 'good' amount, you are not left with any debt and the loan is fully paid off. If you receive a lower amount for the home than your outstanding debt, you will be left with the residual debt of your home.

2. Monthly repayment

If you stay in the house for as long as the term lasts, you can choose to pay a certain amount monthly to the provider of the mortgage. In this way you ensure that there is no outstanding debt at the end of the term. Because you pay a certain percentage in mortgage interest every month, the provider makes a profit.

3. Pay in one go

Do you not want to make monthly payments, but would you rather do this in one go? Then it is also possible to make no interim repayments and to save yourself. In this case, at the end of the term, the entire debt of the mortgage loan, including the interest, is still outstanding. You can use the saved money to pay off this debt, so that nothing is left open after the term. There are risks associated with this form of repayment. For example, you have to be very strict about saving; if you need the saved money for something else in the meantime, you have to compensate this in one of the other months.

Types of Mortgages

Typically, providers offer three types of mortgages. These are the annuity mortgage, the linear mortgage and the interest-only mortgage. You decide when you pay off the debt and how that is done. This choice affects the type of mortgage that you ultimately take.

1. Annuity mortgage

The annuity mortgage is by far the most used, and therefore the most popular. With this credit you pay the same amount every month, so that the debt of your loan becomes increasingly lower. The fact that you pay the same gross every month is because you pay more and more in repayment and therefore the mortgage interest falls. This is done in such a way that the monthly payment remains exactly the same until the end of the term. Because the interest rate falls, your tax benefit also falls. This increases the monthly costs a bit more.

Benefits of an annuity mortgage

  • Building up safe capital through repayment
  • Low costs in the initial phase due to little repayment
  • The risk of an interest rate rise is getting lower due to a lower total loan

Disadvantages of an annuity mortgage

  • Net expenses increase during the term of the mortgage
  • Less tax benefit

2. Linear mortgage

With the linear mortgage, you pay the same amount in repayment every month, in contrast to an annuity mortgage. Where this amount decreases during the term of an annuity mortgage, it remains exactly the same with a linear mortgage. As a result, the mortgage interest rate is very high in the beginning - the total debt is high - but over time this interest rate falls; the total debt is lower. With this form of repayment, your monthly costs decrease during the term, but your tax benefit also decreases.

Advantages of a linear mortgage

  • Building up safe capital through repayment
  • Monthly charges are getting lower during the term
  • The risk of an interest rate rise is getting lower due to a lower total loan

Disadvantages of a linear mortgage

  • Higher net monthly costs at the start than with an annuity mortgage
  • Increasingly lower tax benefit during the term

Interest-only mortgage

The last form, the interest-only mortgage, mainly relates to mortgages where the house is sold in the interim. In this case, nothing will be repaid in the meantime - only interest is paid - and the house must therefore be sold somewhere to yield the outstanding amount. This sale must yield enough money to cover the total amount. If this is not the case, you will be left with a residual debt. This can still be paid with savings, but also with the money from a loan, for example.

Advantages of an interest-only mortgage

  • Low monthly costs; you pay no interest, only redemption
  • No mandatory interim repayment
  • No mandatory capital accumulation
  • No mandatory death coverage
  • Quotations are relatively easier to obtain
  • Can be combined with another form of mortgage

Disadvantages interest-only mortgage

  • You do not build up capital because you do not pay anything off
  • Quite a bit of your own money is needed when closing
  • Risks of falling in the value of your home
  • Monthly charges can rise significantly in the long term: only thirty years deductible
  • Less tax benefit has consequences for pension, for example

Mortgage interest deduction

Paying interest is often seen as a negative side effect with a loan, and therefore also with a mortgage loan. Nevertheless, the mortgage interest also has an advantage: the mortgage interest deduction.

This is a form of tax refund by the tax authorities. You file your tax return every year. When you pay mortgage interest, you may deduct these annual costs from your income during the tax return. This ensures that you have to pay less tax on this income at the end of the year, purely because you also pay mortgage interest.

Current mortgage interest

The amount of the mortgage interest you pay depends on a number of factors. That is why this percentage fluctuates constantly. For example, the level of the interest depends on the Euribor - the interest that banks charge when they borrow money from each other - but also on the capital market interest. This is the interest at which the government borrows money to make expenditure. These two interest rates together determine the mortgage interest that you pay on your mortgage loan.

The current mortgage interest is determined by a simple formula: base interest + risk premium + profit. The base rate is the interest that banks pay themselves. The risk premium is a reserve with which banks cover the risk that some of the people will not be able to pay the mortgage interest. The profit or interest surcharge is the money that the bank itself wants to earn from the mortgage they give you.

Maximum mortgage

Obviously, the level of the mortgage interest also has to do with the level of the mortgage loan itself. The maximum mortgage you can get when you buy a house is calculated on the basis of a number of factors. Of course, the bank looks at what the house is worth, but it also studies your annual income, your savings, your outstanding debts and the income of your partner.

A bank will also always investigate whether the maximum mortgage is not too high in relation to the value of the house that you have in mind.

Interest and security

The fixed-interest period is also an important factor in determining the mortgage interest rate. Usually, a mortgage interest is fixed for ten years. If this is less, for example five years, you have less certainty. If the fixed-rate period is twenty years, there is more certainty. More security also means more mortgage interest. You simply pay for the certainty of a long fixed-rate period.

It is also possible to opt for a variable mortgage interest rate. In that case, the amount of interest paid is not fixed at all; it can rise or fall at any time. This gives you less certainty, with the result that these mortgages are often cheaper than mortgages with a fixed interest rate. When interest rates rise in the case of a variable mortgage, cheap can also become expensive.

Refinance mortgage

Just like transferring a loan, it is also possible to transfer a mortgage. This is simply paying off a mortgage, after which you immediately take out a new, cheaper mortgage. This mortgage is often cheaper due to a new and lower interest rate. Refinancing a mortgage loan can be useful if you want lower monthly costs in the short term or if you want the certainty of lower monthly costs in the longer term. A disadvantage of refinancing a mortgage is that, just like with refinancing a personal loan, you in most cases have to pay a fine.

Conditions of a mortgage

Taking out a mortgage involves signing a contract. It makes sense that this agreement contains terms and conditions. For example, there may be a condition with regard to moving, for example that you cannot move the mortgage to a new home. The contract may also state that a penalty will be charged if you transfer the mortgage or if you want to pay off early.

Other important conditions

In addition to the above conditions, there are also other questions you should ask yourself when taking out a mortgage. The cheapest mortgage is not necessarily the best. These conditions can also play an important role in the choice of a mortgage:

  • How long is the mortgage offer valid?
  • Can the validity be extended?
  • How much does this possible extension cost?
  • Which fixed-rate periods can you choose?
  • Can you take the interest with you when moving?
  • Does a fine have to be paid when moving?
  • What are the possible cancellation costs?
  • What interest applies on the passing date?