Interest rate structures
What is an interest rate structure? Almost every mortgage institution nowadays offers a choice of a variable interest rate and various fixed interest rates for various fixed-rate periods . However, a large number of mortgage institutions also offer a third option: the interest structure or form of interest. This means that the mortgage institution sets up a construction, the aim of which is usually to absorb or mitigate the effects of any future interest rate rise. All these interest rate constructions are derived from the variable and fixed interest. The main interest rate structures and their characteristics are listed below.
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The interest reflection period construction At the end of a fixed-rate period, you must fix the interest again. If you agree on an interest-rate reflection period, the mortgage institution will offer you a somewhat longer period for this. Depending on the exact appointment, you have one or two years to determine the moment of locking. As a result, you are less dependent on the interest rate when the old period ends. For this service, the lender usually charges a surcharge on the normal interest rate.
Entry rate Before you fix your mortgage interest for a certain period with an associated interest rate, you have a period of time to think about the entry rate. You then have the option, usually during the first one or two years, to fix the interest for a longer period during that period. The idea behind the entry rate is that you choose a time within that period when the interest rate has reached its lowest level. The entry-level interest is often chosen in the event of a downward trend in interest rate development.
The bandwidth-interest construction With a bandwidth interest, the rate you pay is based on a variable interest. With variable interest, your interest normally changes very regularly. In a bandwidth construction, a threshold is built in so that your interest only changes when the market interest rate has changed such that it has exceeded the threshold. Only when the market interest rate has fallen outside your bandwidth will your interest be changed by the portion above the threshold. For some mortgage institutions, the threshold only applies to a rise in the interest rate, for others to both a rise and a fall. Other names for this construction are threshold rate, margin rate, buffer rate, balance rate, limit rate, select rate, generous rate, generous rate, vari-fixed or stable rate.
Ceiling interest With Ceiling interest you pay a variable interest rate that is usually adjusted monthly. However, when interest rates rise, you never pay more than the interest ceiling. You agree this interest ceiling with the bank in advance, as well as the variable interest rate. This sounds very interesting, but you should take into account that the ceiling interest rate is (much) higher than the normal variable interest rate. Whether this construction is interesting therefore depends on the mark-up that is used on the normal variable interest rate and on the interest ceiling. This construction is also known as CAP interest.
Mid-interest rate The name middle rate is used for 2 different constructions. In the first variant, the interest rate to be paid is calculated by taking an average of the current interest rate and the average interest rate over the past period. As a result, the interest rate becomes average, so that major surprises are excluded and you have a reasonable degree of certainty of constant housing costs.
The second variant of intermediate interest is also called interest averaging. This takes place when a mortgage is terminated prematurely and a new mortgage is simultaneously taken out with the same lender. The interest can then be averaged. This means that some sort of average is taken of the old and new interest rates according to a certain formula, depending on the maturities of the fixed-rate periods.
Interest baskets With interest basket, your total mortgage amount is split into several loan components. Often 1 part is fixed for one year or a variable rate is chosen. You thus benefit from the low interest rate. The other parts will be given a longer term. But they do not run down simultaneously, so that you limit the risk of a sharp increase in monthly costs.
At most mortgage institutions you can of course also compile such an interest mix yourself. The advantage of an interest basket, however, is that a discount is offered on the standard rates. The downside is that you are stuck with a number of options, making it less flexible than a normal interest rate mix.
Is an interest rate construction interesting? The interest rate structures described above are certainly not all available structures. Interest rate structures all seem very attractive, but have the disadvantage that you ultimately pay the costs of these structures yourself. It therefore strongly depends on your personal situation and future interest rate development whether you will ultimately benefit from it. We strongly advise you to check carefully in advance what will happen if you want to refinance your mortgage at some point in the future. In practice, it appears that often completely different (much less favorable) penalty interest calculations are used than with a standard fixed-rate period.