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My Mortgage: An Interesting Experience

My mortgage: an interesting experience

Post Series: Road to home ownership

Unavoidable in the search for my place in the search for the best mortgage. Trying to find the best mortgage in Belgium typically means going to different banks to get the lowest rate possible while figuring out which type of rate to get (fixed or variable).

What’s a mortgage?

Before we talk about the interest rate of my mortgage, it is important to know what exactly a mortgage means. A small refresher for those that never heared about this (highly unlikely as a reader of this blog, but still):

A mortgage loan is a loan that is taken out to finance the purchase of the real estate.

In exchange for providing a mortgage loan, the lender asks for a guarantee on the property. This guarantee is called the mortgage. In the event of non-payment, the lender can sell the collateral and thus receive his loan back.

As it is a loan, the lender asks a certain percentage, called interest, on top of the money borrowed. I pay this interest regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt. This rate depends on various factors and can be fixed or variable (or something in between).

ECB interest rates
Ever since the financial crisis of 2008 the ECB has been lowering its interest rates slowly but steadily and finally went negative in 2014.

Determining the rate

OK, so that answers the basic question. But how is this interest rate determined? Seperate from the type, there are a lot of things that go into the final rate I’ll have to pay. Although this is actually certain, it is still possible to negotiate this based on the following criteria:

  • My borrower profile: if you are young (more time to pay off the loan), have a steady job (higher chance of being able to pay monthly) and have healthy finances (in case of misfortune), the bank is prepared to offer you a lower rate.
  • The loan duration: the longer you borrow, the greater the risk of non-repayment for the bank. This results in a slightly less interesting APR (NL: JKP).
  • Quotity: the ratio between the loan amount and the value of the home (according to the bank’s calculations). If the quota is 80%, your own contribution must be 20% of the required capital. To give you an idea: if the house of your dreams is estimated at 380,000 EUR excl. cost (banks don’t take taxes and others fees into account), the quota is 80% if you borrow 304,000 EUR and 90% if you borrow 342,000 EUR. So the higher your personal contribution, the less the bank has to invest capital in your project, the lower the risk. Moreover, if you borrow the largest part of the purchase price of your home, then your monthly costs are higher and therefore more difficult to repay.
  • Insurance and additional services taken out with the bank: if you have taken out additional insurance (eg debt balance insurance, fire insurance, etc.) or if you have an account with your lender, you can take advantage of a financial benefit. However, keep in mind the generated costs that may increase the total amount of your loan. By comparing the APRs, you get a better picture and you can choose the most interesting offer. Do note that more often than not these APRs are not 100% accurate as not all costs are known upfront.

Knowing the above, there is one more thing that will determine the mortgage rate. Fixed vs. variable interest rate.

It's the economy stupid

Whether a fixed or a variable rate is the way to go depends on the economic conditions in the market. In Europe we are (still) in an easing period after the financial crisis of 2008. The ECB or European Central Bank, has been keeping the rate low for the last couple of years. Even The Fed (Federal Reserve) has recently cut rates again after it received signs that the economy was slowing.

With the current rate being negative, the banks are required to give money to the ECB if they wish to keep it overnight. This pushes banks to give loans and lower mortgage rates can be a result of this. Of course, there is no direct correlation but it does give some guidance.

In the current climate it can be very interesting to take a fixed interest rate. Does this mean a variable is not interesting at all then? Well not really. Like always, it depends.

Fixed vs variable interest rate

The advantage of a variable rate for mortgages is limited today, and sometimes non-existent. Admittedly, the risk of the variable rate is also limited. The Belgian legislator does not allow the mortgage rate to rise more than it can decrease during the term of the loan. This means that the interest rate doubles in the worst-case scenario. The historically low interest rate means that both the rate of increase and the rate of decrease are limited, because for a long time now, the banks have not been granting housing loans with interest rates that can go below zero.

Moreover, the government is limiting the increase in the first three years. In the second year, the interest rate may only be 1 percentage point higher than at the start, and in the third year it may only be 2 percentage points higher. The banks themselves also set limits on the variation of the interest rate. They determine a tunnel, with a ceiling and a floor, within which the interest can move during the term of the loan. The narrower the tunnel, the higher the interest usually is.

The fixed rate

The benefit of a fixed rate today is that today it’s very low. According to Spaargids.be [NL] the lowest rates clients can get is even below 1%! Of course these are exceptional cases where there are two borrowers with compelling case. The average interest rate now is 1.28%.

Since fixed rate doesn’t change the moment an agreement is signed it’s a very good idea to take it now. The biggest benefit is that you have the certainty about the interest you have to pay over the entire duration of the mortgage.

Fixed interest rates according to Spaargids.be

Putting the above into a table gives the following overview.

Fixed

Fixed mortgage rate

As the name suggests A fixed interest rate signifies that the interest rate is fixed at the start of your mortgage loan and remans so for the entire duration of your mortgage regardless of developments in interest rates.

Positives

  • Your interest rate remains the same every month until the end of your loan.
  • You are shielded from any unpleasant surprises regardless of whether your loan has a term of 15, 20 or 25 years.
  • The fixed rate makes it easier for you to plan your other expenditure and means you can play things safe.

Negatives

  • If the interest rate drops, you can no longer adjust your contract and you will therefore have to pay a higher interest rate than the market indicates at that time.

Variable

If you choose for a variable interest rate, your rate will be adjusted after a certain period of time. This can work in your favour if the interest rate falls, or to your disadvantage if it rises. The exact timing of the interest-rate reviews is set out in the loan product description. How the review of your interest rate takes place, can depend on the laws in your country. In Belgium, the review takes place at least annually or at most every five years.

Positives

  • Your interest rate remains the same every month until the end of your loan.
  • You are shielded from any unpleasant surprises regardless of whether your loan has a term of 15, 20 or 25 years.
  • The fixed rate makes it easier for you to plan your other expenditure and means you can play things safe.

Negatives

  • When the exchange rate fluctuates, the monthly charges also fluctuate. So if the interest rate of the mortgage loan decreases, your monthly costs will decrease, and if the interest rate increases, your monthly costs will also increase. To protect the consumer, a benchmark is published on the FSMA website every month. This benchmark must always be included during the revision of the interest rate in the agreement. The following formula is then applied:
    New rate = base rate + (new benchmark – start benchmark)
  • Each bank offers different formulas, so it is important to compare all the banks with each other in advance in order to choose the formula that suits you best.

APR vs. current mortgage interest

It is important to understand that the mortgage interest rate is only a part of what has to be paid. That’s why there is an annual percentage rate (APR). The interest rate of the mortgage loan is one of the elements that form part of the total rate. This means that the APR consists of the mortgage interest plus various costs.

The APR is a rate that includes various premiums and mandatory costs that are linked to a certain rate formula and the mortgage when you take out a loan. The APR fluctuates due to these premiums and mandatory costs. I.e.

APR = (interest rate + compulsory insurance premiums + other mandatory costs) / borrowed capital.

Costs depending on the amount borrowed

  • Registration fees credit: corresponds to: 1% * (borrowed capital + “accessories”) = 1.1% * borrowed capital.
  • Reimbursement or mortgage costs: amounts to 220 EUR if the loan amount is lower than 272,727 EUR and 950 EUR if the amount is higher.
  • Mortgage tax: calculated as follows: 0.3% * (loan amount + “accessories”) = 0.33% * borrowed capital.

Costs determined by the chosen bank

  • The expertise costs: defined by the bank but not systematically.
  • The handling costs: may not legally exceed 500 EUR.
  • Notary fees: normally 1000 EUR + 21% VAT, or 1210 EUR (the fee (the compensation for the notary is his intervention in drawing up the loan deed) cannot be included in this calculation as specified in the legislation, so it’s not part of the APR).

Costs entail providing a financial benefit on your APR

Debt balance insurance: not mandatory, but most of the time, it is compulsory if you want to qualify for the financial benefit.
Fire insurance: just like with a debt balance insurance, this is not mandatory but you do automatically include it if you would like to be eligible for the financial benefit.
Bank account costs with the lender: in exchange for a lower rate, some banks ask for a bank account to be opened with them and require a direct debit of their income on the same account. If applicable, the costs incurred for this account are also included in the calculation of your APR.

My decision

Taking all of the above into account I aimed to get a good deal on a fixed interest rate. A variable could have been interesting if I could get it low and not be alone but after going to different banks the variable was never low enough to take the risk. I’m not complaining since I was able to get a fairly good deal for a fixed interest rate. I had a few things against me but at the same time I had quite a few elements that worked in my favour:

  • 1 borrow (instead of 2)
  • High project cost
  • High personal equity (140,000 EUR)
  • Parents and grandparents are already client with a specific bank
  • High salary (~2800 EUR)

I went to the following banks and the best mortgage rates I could get:

  • ING – 2.1%
  • Beobank – 1.9%
  • Hello Bank – 1.70%
  • Keytrade bank – 1.73%

I tried to get the best result possible. With the above points, in the end, I got the best fixed interest rate at BNP Parisbas Fortis. The only “downside” is the requirement for a debt balance insurance.
I say downside but it’s not that bad since I don’t want to push it al on my gf in case something happens to me. The above banks had a similar requirement. If the base interest rate wasn’t already better than Fortis I wouldn’t get a better deal with that included.

In the end the mortgage rate I received was:

0%
Interest rate

Important to note with the above rates is that this is not the APR but the mortgage rate. The APR for all of the above mentioned banks was as followed:

  • ING – 2.70%
  • Beobank – 2.10%
  • Hello Bank – 2.10%
  • Keytrade bank – 2.11%
  • BNP Parisbas Fortis – 2.00%

Thanks to the low mortgage rate and a relatively low debt balance insurance Fortis remained the best deal I could get at this moment. It’s not the lowest but it’s definitly a good deal especially as I also decided to take an 18 month deferral. This increased the APR a bit to the one I wrote here.
If all goes well I can stop this deferral sooner and thus start paying off sooner which in turn results in a slightly lower monthly mortgage payment.

I’m happy with what I got, especially since it’s actually an investment property but as I’m going to move in myself first I’m able to get it classified as my first and only home with the bank.

Do you have a mortgage running at the moment? If so please fill in the below poll.

How did your search for a mortgage go? Please leave a comment below and share your experiences.

What's your mortgage rate (NOT APR)?

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Your mortgage (in EUR)

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Mr. FightToFIRE

Writer at Fight To FIRE
I'm the owner and the main writer of FightToFIRE, a personal finance blog focussing on Financial Independence and Retiring Early. During the regular working hours, I'm a developer for a major financial institution in Belgium. During my off-hours, I write. do some weight lifting and other stuff to keep me healthy and fit.
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