Am I against variable interest rates? No, definitely not. As I explained, you pay a lot less interest over the mortgage period. But you need the financial flexibility in your income to be able to bear the payments should the rates go up. But this is also the case when fixing the rate. If you fix for 5 years, you could be faced, theoretically, with a much higher mortgage payment five years from now. So if your budget is tight, it may be worthwhile to fix for 10 years or so. But beware of fixing for too long a period! The average Dutch household moves every 7 years. And if you are an Expat and it is your intention to stay in the Netherlands for say a maximum of 5 years, it would not be wise to fix the rate for much longer than that!
“Shall I fix my mortgage interest rate or should I keep it variable?” is a commonly asked question in our daily financial advice practice. “Depends on the numbers” is my usual answer. Fact is that if one compares the sum of interest paid for a 30 year variable mortgage interest rate to that for a mortgage where the interest was fixed for say 5 or 10 years at the time, the variable rate comes up trumps. This has been the case for any 30 year period in the past and will thus almost certainly be the case for the future. (Despite the fact that some unimaginable things have happened in the banking world in the last year or so).
According to the Dutch Central Bureau of Statistics, the difference in interest between a fixed and a variable rate has been approximately 1,5% since the Second World War. Normally, the longer one fixes the interest rate, the higher the mortgage interest rate will be. This is because the banks also do not know how market interest rates will develop in the long term and therefore safeguard themselves by applying a higher interest rate when they can no longer change it for some years.
So obviously it seems an attractive option to choose a variable mortgage interest rate. But there are some risks involved in choosing a variable rate. According to the Dutch Central Bank, variable rates are dangerous and home owners expose themselves to a rate increase. A variable rate is normally speaking the lowest rate available. But if the rates go up, which could always happen, one feels this directly in one’s monthly budget. An optimist will not consider this a problem, as he or she will figure it is easy enough to switch to a fixed rate, at any time. Although this is true of course with most banks, the following has to be considered.
Hopefully this person has been well advised by his or her mortgage advisor and has enough financial flexibility to be able to bear the higher monthly payments that usually come when fixing the interest rate. Secondly, banks have the habit of offering more attractive rates to new clients than to existing ones. Suppose you buy a house today and the bank offers you a rate of 5% for 5 years fixed and you accept this offer; 5 years from now you are up for an interest renewal. Suppose at that time market interest rates for 5 years fixed are around 5,5%. Your bank will then probably offer you a five year extension for a rate of 6%! You will be totally horrified of course, since your colleague has just bought a similar house, has chosen a similar mortgage from the very same bank and he or she has been offered the market rate of 5,5%. Are you being penalized for being a good customer for 5 years already? Maybe you are, maybe you are not. I do not wish to go into the bank’s motivations, since I am sure they will have their reasons for their policies. But I do always warn my clients to be prepared for a rate that is higher than the market rate when the interest is up for renewal. And this also goes for fixing your mortgage interest rate when you are on a variable rate. So bear this in mind when choosing a variable rate.
Am I against variable interest rates? No, definitely not. As I explained, you pay a lot less interest over the mortgage period. But you need the financial flexibility in your income to be able to bear the payments should the rates go up. But this is also the case when fixing the rate. If you fix for 5 years, you could be faced, theoretically, with a much higher mortgage payment five years from now. So if your budget is tight, it may be worthwhile to fix for 10 years or so. But beware of fixing for too long a period! The average Dutch household moves every 7 years. And if you are an Expat and it is your intention to stay in the Netherlands for say a maximum of 5 years, it would not be wise to fix the rate for much longer than that!