What is interest averaging? Averaging your mortgage interest with the new current interest rate is interest rate averaging. Interest rate averaging usually means a cheap average mortgage interest rate. If your mortgage interest rate is higher than the current market interest rate or if the end of the mortgage term is approaching, mortgage interest rate averaging can save you a lot of money. Averaging the mortgage interest rate means a cheaper mortgage. Easily reduce your monthly costs and save on your mortgage costs. Have you already thought about a split mortgage?
Mortgage interest rates are falling
If the mortgage interest rate falls and you already have a mortgage, you will not automatically benefit from this lower interest rate. What can you do to benefit from this?
I have a mortgage with a fixed interest period, request an interest rate proposal
If the fixed-rate period of your mortgage does not expire in the coming years, you will not notice much of a higher or lower market interest rate. This is different when you have to extend your mortgage because the fixed interest period is ending. Interest averaging is then a possibility. The savings mortgage is an exception to this, because a lower mortgage interest rate also means a lower savings interest rate and therefore on balance there is little benefit. You can also ask the bank for an interest rate proposal and see if the offer is favorable for you.
First-time buyers on the housing market and interest rate averaging
First-time buyers on the housing market not only find that it is not always easy to take out a mortgage, but house prices are high and so are the associated monthly costs. First-time buyers can also benefit from a lower mortgage interest rate. Interest averaging can be a useful solution for them.
Term of the mortgage
Every mortgage has a specific term and at some point that term will end. This offers opportunities for those who want a different mortgage interest rate on their mortgage. It is the time to also look at other mortgage providers to see whether the mortgage interest rate might be lower than what you are paying now and lower than what the current mortgage provider is offering as a new interest rate. You can also refinance a mortgage in the meantime, if the market interest rate is lower than the mortgage interest rate you are currently paying. Another option that I would like to discuss here is the possibility of interest rate averaging. Averaging the mortgage interest can be an advantage with both a higher and a lower mortgage interest rate. Benefit from a low average interest rate.
What is mortgage interest averaging, what are your rights?
With interest rate averaging, the mortgage interest rate is weighted on average with the current mortgage interest rate. This weighted average takes into account the period that your mortgage is still running and the new period for which you want to extend your mortgage. Whether interest rate averaging has sufficient benefits depends on the old and new interest rate and the term of the mortgage. Then there are a few possibilities:
- The old mortgage interest rate is a lot lower than the new mortgage interest rate. In that case, the lower mortgage interest on your existing mortgage will lead to a lower mortgage interest rate than the market interest rate through interest rate averaging.
- The old mortgage interest rate is equal to the new market interest rate. In that case, interest rate averaging makes no difference.
- The old mortgage interest rate is higher than the new market interest rate. In that case, the higher old interest rate when averaging results in the mortgage interest rate being higher than the new mortgage interest rate, but lower than the old one. Interest rate averaging can also offer advantages in this case, especially if your mortgage still has a term to run.
Interest rate averaging formula, calculation of the result of interest rate averaging, you can calculate it yourself
Using a simple formula, the new weighted mortgage interest rate for interest rate averaging can be calculated as follows (excluding penalty interest, administration costs): Rnew=((Roud*remaining term)+(Rmarket*(newTerm-remaining term)))/newTerm. Here are:
- Rnew = new weighted mortgage interest rate,
- Roud = the mortgage interest on your current mortgage,
- remaining term = the months that your existing mortgage still runs,
- Rmarket = the new market interest rate,
- new Term = the months of the new mortgage. A new mortgage for 10 years means that new term = 120.
Calculation example of interest rate averaging
Just two calculation examples:
- Suppose the old interest rate is 5%, the new one is 7%, the remaining term is 40 months and the new term is 120 months. Then Rnew= ((5*40) + (7*(120-40))/120= 6.33 percent. That is higher than the 5 percent you pay now, but clearly lower than the 7 percent that the new market interest rate would be when refinancing the mortgage.
- Make the same assumptions as in 1, with the difference that the old interest rate is 7% and the new one is 5%. Then Rnew= ((7*40) + (5*(120-40))/120= 5.66 percent. That is clearly lower than your current mortgage interest rate of 7 percent, but higher than when refinancing the mortgage. mortgage.
Penalty interest when refinancing a mortgage
Both transferring a mortgage and interest rate averaging entail administration costs. Moreover, a lower new interest rate means that the bank often imposes a penalty interest. The penalty interest when refinancing a mortgage can make it expensive and also make interest rate averaging expensive, but the advantage is that the penalty interest is tax deductible just like the mortgage interest. This means that it is best to ask your bank to make a few calculations for you with different terms and interest rates. Based on this, see what will be the cheapest mortgage for you with a cheap mortgage interest rate. The penalty interest can also be offset against the new interest, which will then be increased slightly, spreading the penalty over a long period. Any other surcharges from the bank are not tax deductible.
Interest rate averaging Rabobank and ABN AMRO
Rabobank offers interest rate averaging. The above formula plus 0.2% administration costs applies. ABN AMRO increases the average interest rate by 0.2% administration costs plus another penalty surcharge.
What is a split mortgage?
With a split mortgage, you ensure an average interest rate yourself in a different way. You do this by shortening the total term of the mortgage. You choose part with a variable interest rate, part for example 10 years fixed and part 20 years fixed. Any way of cutting up is possible naturally. The advantage is that you spread the risk somewhat. Each term has a different mortgage interest rate so that you do not have to refinance everything in one go. On the other hand, refinancing everything in one go can be a lot cheaper if the mortgage interest rate is low at that time.
Conclusion of applying for interest rate averaging
Ask about the possibility of averaging the interest. If you are entitled to it, it is a simple way to reduce housing costs. This will most likely make it a lot cheaper for you and thus save on mortgage costs. If you want less risk, then splitting the term (cut-up mortgage) might be something for you.