Fixed interest period
What is the fixed-rate period? The fixed interest period is the period for which the interest rate to be paid by you is fixed. A fixed interest period of 5 years therefore means that you and the mortgage institution agree on what interest rate you will pay over a period of 5 years. In general, the interest rate increases as the fixed-interest period becomes longer (see also the general explanation of interest ).
Other names for the fixed-interest period (fixed-interest period) are the interest-rate term and the interest period. Incidentally, the fixed-rate period is slightly different from the term of the mortgage. The term of the mortgage is often much longer, usually 30 years.
Compare current mortgage rates for different fixed-rate periods
Choice of the correct fixed-rate period Since the term of the fixed-interest period has a major influence on the mortgage interest rate, it seems beneficial to choose the fixed-interest period as short as possible. However, the shorter the fixed-rate period is fixed, the sooner you will notice the negative consequences if the interest rate starts to rise. The following factors are important when choosing the fixed-rate period:
These factors are discussed in detail below.
- The mortgage amount
- The interest rate vision
- The interest structure
- The residential horizon
The mortgage amount If you borrow a large amount in relation to your income (a high Loan to Income, LTI), it can be risky to go for a short fixed-interest period. In that case, you will pay a low interest rate in the beginning ( low mortgage payments per month ), but the shorter you fix the interest rate period, the sooner you will notice the negative consequences if the interest rate starts to rise sharply. If you have opted for a very short fixed-rate period, this choice can quickly get you into trouble. Mortgage institutions and supervisors take this risk into account and that is why they apply the principle that the maximum amount to be borrowed is higher for a fixed-interest period of 10 years or longer than for a fixed-interest period of less than 10 years.
The interest rate vision With regard to the choice of a fixed-rate period, it is wise to choose a short fixed-interest period if the interest rate will fall (further) or remain the same and a longer fixed-rate period if the interest rate starts to rise. However, to be able to determine this, you must forecast the interest rate development.
Forecasting interest rates, the historical interest rate development is often taken into account. If we look at the interest chart attached to this text, 2 things stand out. Firstly, it appears that interest rates have been historically very low in recent years. Secondly, it is easy to see that interest rate developments are erratic with enormous results.
Based on the historically low interest rate level, it currently seems attractive to choose a somewhat longer fixed-rate period. However, we believe that, given the erratic nature of interest rate developments, it is very difficult, if not impossible, to forecast interest rates for the longer term. We are therefore always very careful with our forecasts and therefore usually do not include an interest rate vision in the choice of the fixed-rate period.
Interest structure By interest structure we mean the difference between short and long-term interest. Normally, the interest rate increases as the fixed-rate period becomes longer. The difference between 1 year fixed interest and 30 years fixed interest can sometimes be several percent. However, there are also periods where the difference between short and long is very small. In that case, you pay a relatively small surcharge for a long fixed-rate period. In view of this small mark-up, it is almost always wise to opt for a long (er) fixed-rate period in such periods.
Residential horizon By residential horizon we mean the period that you expect to continue living in your new home. If you have a residential horizon of 5 years, it is generally not wise to fix your fixed-rate period for, for example, 15 years. Despite the fact that many mortgage institutions nowadays offer a relocation arrangement so that you can take your mortgage with you when you move, in practice it appears that when you move, a completely new situation arises where the existing mortgage no longer suffices. The moment you indeed sell your home after 5 years and buy a new house, there is a good chance that you will pay off your current mortgage and take out a new mortgage. In that case, you have paid an interest rate during those 5 years that corresponds to a 15-year fixed-rate period. Since, in general, the interest rates increase as the fixed-rate period becomes longer, you have paid (much) too much interest during those 5 years. We therefore recommend in most cases not to fix the interest for longer than your residential horizon, unless the interest rate differential with a longer fixed-rate period is very small (see previous point, interest structure).
The interest mix With most mortgage institutions it is not mandatory to go for 1 fixed-rate period. You can often also choose a combination of fixed-interest periods. This is also referred to as an interest mix. The advantage of choosing multiple fixed-rate periods is that you can spread your interest rate risk in this way. For example, nowadays it is regularly chosen for a mix between a variable interest rate and, for example, a 10-year fixed-rate period. In this way, the average interest rate to be paid is low (thanks to the variable part), but the interest rate risk remains within limits (thanks to the 10-year fixed-interest part). In addition, almost all mortgage institutions nowadays offer interest rate constructions, giving you even more flexibility in your choice of interest.