Mortgage Switching Penalty

The key points at a glance

When does switching your mortgage make sense? If you switch during a fixed-rate period, you'll face a penalty. Read here how to calculate it and when it's worth making the switch.

1. When should you switch your mortgage?

There are various reasons to switch your mortgage. The most obvious one is to take advantage of a lower interest rate, so you can save on your monthly costs.

Other reasons include:

• If you're renovating or making your home more energy-efficient, switching your mortgage can be beneficial. If your income allows it, you may be able to increase the mortgage at the same time.
• If you currently have a fixed rate for 10 years but want to lock in the rate for 30 years, for example to take advantage of currently low interest rates.
• You benefit from better terms with the new mortgage.
• If the market value of your home has increased. This means you are financing relatively less compared to the value of the property, which can open up lower interest rates since the bank takes on less risk.

2. How does switching your mortgage work?

Switching is simply taking out a new mortgage to pay off the existing one. In other words, your current mortgage is replaced by a new mortgage with a different interest rate and different terms.

When your fixed-rate period is coming to an end, you'll receive a new proposal from your current provider no later than 3 months before it expires. It's wise to do a thorough comparison of your options, as another mortgage provider may be a better fit for your current situation.

Do you want to switch while the fixed-rate period is still running? Then you'll face a penalty.

3. Costs of switching your mortgage

Switching your mortgage comes with costs. Which costs apply depends on your situation.

Possible costs when switching your mortgage:

• Valuation costs (approx. €500)
• Notary fees (approx. €1,000)
• Advice and brokerage fees (approx. €2,200)
• Mortgage deed costs (approx. €500)
• NHG (national mortgage guarantee) costs (0.7% of the mortgage amount)
• Penalty interest (varies per case)

All of these costs are tax-deductible.

4. Penalty interest when switching your mortgage

When you take out a mortgage, you agree to a contract with a fixed-rate period. The bank counts on receiving interest income during that period. If the contract is broken early, you'll face a penalty.

The penalty can be substantial and many people can't pay it out of pocket straight away. Fortunately, it is possible to include the penalty in the new mortgage. If the penalty is rolled into the new mortgage, the interest you pay on that portion is not tax-deductible.

In the next section you can read how the penalty interest is calculated.

5. Calculating mortgage penalty interest

To calculate the mortgage penalty, the following factors play a role. The example below uses fictional figures:

• Remaining fixed-rate period: 36 months
• Remaining mortgage balance: €100,000
• Total mortgage amount: €300,000
• Current interest rate: 5%
• New (current market) interest rate: 2%
• Penalty-free repayment percentage: 10%

Calculation example

1. Multiply the total mortgage amount by the penalty-free repayment percentage. For example: €300,000 x 10% = €30,000.
2. Determine the amount on which the penalty interest is calculated by subtracting the penalty-free repayment (see step 1) from the remaining mortgage balance. a. The remaining mortgage balance is €100,000. €100,000 - €30,000 (see step 1) = €70,000. The penalty interest is calculated on this amount.
3. Calculate the difference between your current rate and the new rate, then multiply by the remaining term in years. a. Current rate 5% - new rate 2% = 3%. Remaining fixed-rate period = 36 months (3 years). The interest difference is therefore 3% x 3 = 9%. 9% of €70,000 = €6,300.
4. Once you have calculated the penalty interest of €6,300, you have determined the actual penalty.
5. Calculate whether the lower monthly costs with the new mortgage outweigh all costs including the calculated penalty. This is how you can determine whether switching is worth it.

6. Is switching your mortgage worth it?

Logically, the benefit must be greater than the costs involved. If you're facing a high penalty, it may therefore make sense to hold off on switching. If you want to increase an existing mortgage for a renovation, it's often worth switching at the same time since you'll already be incurring the mortgage costs anyway.

To be sure that switching is worthwhile, we recommend speaking with an independent adviser. This is usually free and without obligation.

Frequently asked questions

What is penalty interest?

Penalty interest is a compensation paid to the bank when you switch your mortgage or break the fixed-rate period early.

Why does the bank charge penalty interest?

The bank misses out on income if you break the agreed fixed-rate period early to get a lower rate or switch to a different mortgage. The penalty interest compensates the bank for that lost income.

How is penalty interest calculated?

You can calculate the penalty based on the outstanding mortgage balance, the remaining fixed-rate period, and the interest rate.

Is penalty interest tax-deductible?

You can deduct the penalty interest from your taxes if you pay it in one go and keep the same mortgage. When switching, you can deduct the penalty interest once, but the interest on any increase in the mortgage is not deductible.

What is interest rate averaging?

With interest rate averaging (rentemiddeling), a new interest rate is determined based on the average of the old and new rates. This way you spread the interest penalty over a lower rate across the remaining term rather than paying it all at once. Not all mortgage providers offer this arrangement.