For the past year or two, mortgage interest rates have been extremely low. For a regular mortgage, with interest fixed for 10 years, the rate was approximately 1,50 percent. Independent Expat Finance explains why mortgage rates have soared in recent years and how this affects home-buyers today.

Since January, mortgage interest rates have shot up and for the same mortgage set up, the rate would now be approximately 3,35 percent. That’s more than double in just a few months and it is the largest increase in the Netherlands in such a short time in over 40 years. But what does this mean for home buyers or owners on the Dutch market?

Mortgage affordabilityRising mortgage interest rates affect affordability first and foremost. Not only are property prices still high but now you will also pay more for the loan. In December 2021, a regular mortgage of 500.000 euros with the interest fixed for 10 years on an annuity repayment scheme would set your monthly gross expense at 1.726 euros. Now, your monthly gross expense would be 2.204 euros. That is a 28 percent increase. The only positive thing is that you could claim a larger tax rebate, as this is related to the interest payments.

Another impact of higher interest rates is the maximum borrowing capacity. On an income of 80.000 euros, you can borrow 424.972 euros at 1,50 percent. At 3,35 percent, this is 408.428 euros. Furthermore, you can expect that next year, the mortgage lending standards of NIBUD (Dutch National Institute of Budget) will be tightened because households are now paying more for energy, groceries and fuel. This impacts how much of your income is left to spend on a mortgage and this will again lower your maximum borrowing capacity.

Housing pricesAccording to ING Research, the risks of decreasing housing prices have significantly increased due to rising mortgage rates and inflation. Nevertheless, they still expect a year-on-year increase of 13,5 percent for 2022 and 1,5 percent for 2023, and think it is pre-emptive to make any further conclusions. Real estate association NVM confirmed last month that, in Q1, housing average sales prices dropped by 2 percent. It will be interesting to wait for data on the next quarter coming in June.

What are potential buyers doing?With higher costs and bigger risks, potential buyers are taking a more reserved position when entering the housing market. If you’re an expat but might move abroad again within a few years and you are risk-averse, now might not be the ideal time to buy a property. Slightly fewer competitors and the higher mortgage expenses have made overbidding necessary to be successful. On the plus side, it means your chances might now be better to win a bid compared to a few months ago.

Less clients are opting for fixing their interest at 20 or 30 years because of the high rates. Also, interest-only schemes (where you do not pay back the principal) are not so attractive anymore with these higher interest rates. This is because new buyers don’t get a tax rebate on this scheme while with an annuity or linear scheme you do get this and, with higher rates, this makes a big difference.

For second-time buyers, it might be possible to take their current home’s mortgage rates and terms along when they buy a new home. For example, you have a mortgage debt of 300.000 euros at 2 percent on your current home which is worth 500.000 euros. You want to buy a home for 700.000 euros. Your surplus value of 200.000 euros you take along with you, so you will need to finance 500.000 euros with a mortgage. Rather than a 500.000-euro mortgage at 3,35 percent, you can take along the 300.000 euros at 2 percent and set up 200.000 euros at 3,35 percent.

Do note that you are bound to stay with the same mortgage provider and, if the remaining number of years that your interest is fixed is less than 10 years, it can impact your borrowing capacity.

Should I still buy a property now?It depends on what your current situation is and what your plans are. If your rent is very high or you are planning to stay in the Netherlands for the long-term, buying can definitely still be an interesting option. Risks have increased and you will be paying more for your mortgage, but if the alternative is worse, it still might be a good idea.

If you have had a mortgage intake meeting more than a few months ago, it would make sense to check again with your mortgage advisor how the current conditions impact your maximum borrowing capacity and what it means for your monthly expenses.

If you have any more questions about rising interest rates and how they might affect you, do not hesitate to contact Independent Expat Finance. Their experienced and professional team are on hand to discuss your options and help organise the best mortgage for you.

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