Variable interest rates

To fix or not to fix, that is the question...

Variable interest rates

Variable interest rates mean you pay a lot less interest over your arranged mortgage period. However should the rates increase, you will need to make sure you have the financial flexibility in your income to afford the payments.

This is also the case when paying for fixed rates. If you have a fixed rate for 5 years, you could be facing (theoretically) 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.

You should also be aware of fixing for too long a period! The average Dutch household moves every 7 years, and if you are an expatriate 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!

Should I fix my mortgage interest rate or should I keep it variable?

This is a commonly asked question and it really “depends on the numbers”. The fact is that if you compare 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 almost certainly be the case in 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 the length of time you fix the interest rate for, 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 they safeguard themselves by applying a higher interest rate when they don't have the option of changing it for some time.

Are there any risks involved when choosing a variable rate?

It obviously seems an attractive option to choose a variable mortgage interest rate, but there are of course, some risks involved. 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. However, if rates increase, which could always happen, your monthly budget will be directly affected. If you're an optimist, chances are you will not consider this a problem, as you'll tell yourself that it won't be a problem to switch to a fixed rate at any time. Most banks offer their customers this option, but you must consider the following:

  • You should make sure you have been well advised by your mortgage advisor and that you have enough financial flexibility to be able to bear the higher monthly payments that usually come when fixing the interest rate.
  • Bear in mind that banks tend to offer more attractive rates to their new clients than to their existing ones. Supposing you buy a house today and the bank offers you a rate of 5% for 5 years fixed interest and you accept this offer. 5 years from now you are up for an interest renewal and 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, have chosen a similar mortgage from the very same bank and they have been offered the market rate of 5,5%. Are you being penalized for having been a good customer for 5 years already? Maybe you are, maybe you aren't. Banks have their reasons for making such pollicies, and you should be prepared for a rate that is higher than the market rate when the interest is up for renewal. This is also the same situation when you fix your mortgage interest rate when you are on a variable rate.

Article by de Boer Financial Consultants. For financial advice when moving to the Netherlands, contact +31 (0)70 511 8788.

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