Mortgages
Jan 21, 2023
Should you fix your mortgage interest rate in 2023 or wait until it drops?
Want to know the ins and outs of fixing your mortgage interest rate? It's a strategic decision, and while a longer period is safer, it can also be more expensive. Let me break it down for you and give you some advice for different situations.
First, let's define what fixing your mortgage interest rate actually means. When you take out a mortgage, you are basically borrowing money from the bank to buy a house. Of course, this money doesn't come free of charge, so the bank charges you an interest rate on the amount you borrow. That's what we call the mortgage interest rate.
With a fixed rate, you lock in that interest rate for a certain period of time. This means you'll pay the same interest rate each year, which gives you certainty about what you'll be paying in interest and helps you avoid any unexpected surprises. There are different options for fixing your mortgage interest rate. Popular periods include 1,2, 3, 5, 10 and 20 years, but you can also fix the rate for 1 or 30 years. And you can also choose not to fix the rate at all and keep it variable.
Explaining the interest rate options and the pros and cons
Fixed rate period
Most people choose a fixed rate period of ussually 10 years. You lock in the interest rate for a number of years. With a fixed rate period, you know exactly what you'll be paying in interest for the next few years. You'll generally pay a slightly higher interest rate, but it does give you financial peace of mind and certainty.
Pros:
The certainty, no matter what the market does, you'll pay the same interest rate for the period you've fixed. Any increases in interest rates won't affect the amount you pay.
Cons:
If interest rates fall, you won't benefit from it. You'll still pay the fixed percentage. Also, you can't switch to a different type of mortgage or lender without penalty before the period is over. Additionally, generally speaking, the longer you fix the interest rate, the higher the interest rate will be.
Variable rate mortgage
With a variable rate mortgage, you can change the interest rate each month. You don't know in advance what you'll be paying in interest the next month. The interest rate is linked to the market interest rate and can go up or down each month.
Pros:
If interest rates fall, you'll benefit from it right away. You can switch to a different mortgage lender or type every month. And you can choose to fix the interest rate at any time at the then current rate.
Cons:
If interest rates rise, your monthly mortgage payments will increase. It's less predictable than a fixed rate mortgage, so you may be in for some surprises.
Mortgage Interest Rates in 2023 in The Netherlands
In 2018 up until and a large part of 2022, mortgage interest rates were historically low, around 1-2%, depending on how long you fixed it for and when you took it out. But in April/ May 2022, rates suddenly started rising.
Due to this unexpected increase, there's a good chance that a correction will come and rates will decrease in the coming years. We're also noticing that banks are promoting longer fixed rates. This is a good indication to do the opposite. They think that longer fixed rates will benefit them more. Keep in mind that no one has a crystal ball. The chance is greater that rates will increase in 2023, but they can always drop during the year.
For how long should I fix my interest rate for?
Your personal situation also plays a role in fixing your mortgage rate. Let's look at different scenarios:
Young people:
For young people, it may be smart to fix the mortgage for a longer period of time, such as 5, 10 or 20 years. Especially if you don't plan to live in this house for the rest of your life. The good thing is that you won't be taking a risk if interest rates increase in the coming years. If you decide to move after a few years, you have two options: take the mortgage with you to the new house or take out a new mortgage without penalty. If rates are lower, you'll choose the latter.
Older people:
Are you between 50 and 55 years old? Then choose the longest fixed rate period possible. By the time you retire, you don't want to be surprised by a much higher mortgage rate. A slightly higher interest rate, but certainty, is preferable.
Short-term living:
Do you know (almost) for sure that you'll be selling the house in a few years? Then a shorter fixed rate period may be interesting. You'll then be paying a lower interest rate.
Curious about the best option for your personal situation? Request a free consult session now!
So, depending on your personal preferences and the current market situation, you can choose the best option for you. And remember, it's always a good idea to consult with a financial advisor before making any big decisions.
