When deciding on the structure of your mortgage the ‘interest contract’ is an important part. You have to decide between a long- or short-term interest period and that’s a tough choice. Is the interest going to be lower in the future? Or on the contrary?
Predicting the future is very difficult and is unfortunately not included in our service. However we are happy to share our philosophy on a measured interest strategy with you.
WHAT IS INTEREST RISK?:
Simply put, interest risk is ‘the possibility of an increase of the interest rate during the term of your mortgage’. An increase of the applicable interest will lead to an increase of your mortgage expenses. Therefore it is important to try and see at what point the mortgage expenses become too heavy to carry, and think about a way to cover this risk.
1. TEST YOUR BORROWING CAPACITY PER INTEREST (PERIOD):
Your borrowing capacity is, among others, calculated based on the current interest rate and the potential interest risk.
Mortgage providers look at this as follows:
| Positive | Negative | |
|---|---|---|
| Short-term interest period | Lower interest rate | Higher interest risk |
| Long-term interest period | Lower interest risk | Higher interest rate |
You should base your choice for an interest period on your personal situation and wishes. If you want to maximize your borrowing capacity, a 10 years fixed period is the optimal combination between interest rate and interest risk. However if you wish to have more certainty on your monthly expenses and a low interest risk in the future, a longer interest period is a better alternative.
2. FLEXIBILITY:
With flexibility we mean the degree to which it is easy to change your mortgage structure or mortgage provider. Usually a longer fixed interest period means less flexibility. Flexibility is most important when you are planning to renovate or even move in the (near) future.
3. ALTERNATIVE WAYS TO LOWER YOUR INTEREST RISK:
Your interest risk can also be lowered by (accelerated) capital repayment. A lower mortgage debt means lower interest payments and in some cases even a lower interest rate.
As an alternative some people choose to keep extra savings on hand as a safety in case the interest rate unexpectedly increases. However for this option a certain degree of discipline is crucial.
NOW YOU KNOW THIS:
As mentioned above there are several ways to look at ‘interest’. If you would like to discuss your personal situation more in depth, don’t hesitate to contact us. We love a good conversation.
Interested in other mortgage topics? You may want to take a look at (one of) the following articles.
Do you have any questions?
