If you a mortgage agreement with a lender, you speak out for what period you want to fix the rate. Then it can be 1 year, but also 5.10, 15 or 20 years. Even periods of 30 years are possible. The big advantage of this is that you are certain that – should the mortgage interest rate rise in the coming years – you will not be bothered by this. Your interest is fixed.
However, the bank itself has also borrowed the money that the bank lends to you. Preferably from someone who wants to lend the money to the bank for as long as you want to borrow from the bank. You pay a higher interest rate than the bank pays for borrowing this money. This difference is actually the margin for the bank. From this difference, the bank pays its operating costs, the risk that the bank runs and it contributes to the bank’s profit.
If you pay off the loan earlier than agreed, and the interest has since fallen, a problem may arise. We give a fictional example.
The bank makes an agreement with a saver that it will borrow € 100,000 for 20 years at an interest rate of 4.5%. The bank then lends this amount to you. Also for 20 years, but at an interest rate of 5%. Now you decide to repay the loan in one go after 10 years. At that time, the interest in the market is only 2.5%.
This then has the following consequences for the bank:
The bank must pay the person from whom it has borrowed the € 100,000 for another 10 years 4.5% interest;
The bank will receive the € 100,000 back from you, but can now only lend it at 2.5%. The bank therefore has a loss for the next ten years. This is because you wish to repay the loan earlier than agreed.
Penalty interest due to mortgage refinancing
Banks therefore charge costs in such situations. The amount of these costs is determined by the amount of the mortgage, the number of installments that you pay earlier and the difference between the current mortgage interest and the agreed interest. The costs that can be charged can be high and easily run into the tens of thousands of euros. Early repayment is therefore only interesting if you take out a new mortgage at such a low interest rate that you will repay this fine within a number of years.
Banks were previously free to decide for themselves how they calculated the penalty interest. This was then included in the mortgage agreement. The European Union has put a stop to this to protect consumers. Since 2014, banks are only allowed to charge their actual damage as a fine. It now appears that not all banks do this equally correctly. This is a reason for the Financial Markets Authority (AFM) to prescribe in detail how banks should calculate these fines. It has also been stipulated that banks that have calculated excessive fines since 2014 must refund the excess amount charged to the consumer.
Do you want to know how much you can save on your mortgage costs due to the changed regulations?