Recently, one of our team found themselves considering a radical solution to saving money. Spoiler: It’s not that radical; it’s actually downright sensible.
After weeks of consideration, he signed on the dotted line and refinanced his apartment, promising the bank to pay back a huge amount of money in exchange for a cash injection into his bank account now.
So why had he done this? After much consideration, examining spreadsheets, and thinking it over, he knew this was a good idea. The process can seem daunting, and seeing the total amount of money owed to the bank looks horrifying. Still, under certain circumstances, it makes complete sense to release equity in your home by refinancing.
So why did he do this? There were several aspects to the process. Firstly, he could secure a better mortgage rate, thereby reducing the amount of interest he was paying each month. Secondly, he received an additional loan amount, added to the repayable mortgage amount, as an equity release. This means that the bank agreed to lend him more money because his property had gone up in value over the previous few years.
Including the money he took out, his total monthly interest payment went down! Essentially the bank gave him free money in comparison to what he was already paying back monthly. These additional funds are going to be invested, along with his monthly savings.
Real Estate
So the real estate market in many countries has been a massive expansion in the last couple of years. While not everywhere can see the gains of New York, London, or Paris, it’s generally a golden rule that property always goes up in value. That rule is likely to remain while pressure remains on the stock of available properties.
Even in times of depression on the housing market, you still don’t lose out. If your property drops by 40% in value, so too does the rest of the market. If you have liquid funds available, this is the perfect time to swoop in and buy the most expensive property you can afford, as housing prices, historically, have always rebounded.
Out With the Old, In With the New
The original mortgage had a discounted fixed rate for the first few years, but it switched to a variable rate at the end of the discount period. At the time of remortgaging, the rate was 5.25%.
By refinancing, the new mortgage rate is 2.25%, fixed for 15 years. This 3% rate is simple to understand monthly saving.
By borrowing an additional $30,000, our colleague is back to spending the same every month for his mortgage, but that money is now free to be invested.
Appreciation Baby!
Suppose you brought your house several years ago, hope online, and check out the sales prices of your nearest neighbors. There are sure to be a few representative sales of similar properties that will help guide you to gauge the current value of your property. You’ll see that your house price appears to have gone up. This is house price appreciation.
It is this incremental increase in price that allows refinancing of your mortgage. Essentially, the difference between what you owe the bank and what the house is now worth is the amount of capital you possess. The more capital you have, the safer the risk you are for a bank, therefore allowing them to loan you more.
Why This Was a Good Idea
So many people will say taking out loans to have the capital for investments is a bad idea. Generally, we agree with them, but there are always exceptions. If you can borrow money at a super low-interest rate and reinvest it in a significantly higher rate investment, that is one of those times an exception can be made.
Be aware, the following section contains a lot of numbers. Nerds will be happy.
Comparing Before and After
When comparing the before and after scenarios, we would want to look at the interest our colleague was paying on his original loans and the interest he is paying now. If we compare those, we get the following result.
Straight Forward Calculation
| Amount | Interest Rate | Yearly Interest |
|---|---|---|
| Current | ||
| 149,800 | 1.90% | 2,846 |
| 8,700 | 3.40% | 296 |
| 158,500 | 1.98% | 3,142 |
| New | ||
| 158,500 | 1.40% | 2,219 |
| 29,000 | 1.40% | 406 |
| 187,500 | 1.40% | 2,625 |
| Difference | ||
| 29,000 | -1.78% | -517 |
As you can see, when looking just at the raw interest rates, he is essentially being paid by the bank for taking out additional capital.
Of course, the world is never as straightforward as this. We have to take into account tax deductions on the interest paid and the net fees for refinancing. If we incorporate those, we get:
Detailed Calculation
| Amount | Interest Rate | Yearly Interest | Remarks |
|---|---|---|---|
| Current | |||
| 149,800 | 1.14% | 1,708 | Applied 40% deduction |
| 8,700 | 2.04% | 177 | Applied 40% deduction |
| 158,500 | 1.19% | 1,885 | |
| New | |||
| 158,500 | 0.85% | 1,1331 | Applied 40% deduction |
| 29,000 | 1.40% | 406 | No deduction on secondary mortgages |
| 187,500 | 0.93% | 1,737 | |
| Difference | |||
| 29,000 | -0.51% | -148 | Less profit but still the bank pays me while handing over money |
| Net interest saved over 6 years (fixed rate term) | -888 | ||
| Net refinance fees and costs | 1,200 | ||
| Total net costs | 312 | ||
| Net costs per year | 52 | ||
| Yield on 27,800 | 0.19% | ||
| Break even 2nd mortgage | 1.46% |
That means that he will have to make an easily attainable 0.2% interest on the money to break even with the original mortgage after considering any tax-deductible interest and the refinancing fees.
Worst Case Scenario
The worst that can happen is that both stocks and apartment values will decline during a market crash. If that were to happen, our colleague would have to stay put. Making the monthly payments would not be difficult, but moving house might be harder for a few years. Anyway, like us, he has an emergency fund in case things go south.
Conclusion
With the money in the bank as of last week, all our newly minted friend has to do is buy us a round of drinks and then invest the rest in the highest yield account or investment vehicle he can find. Check out our investment strategy for how we’d do it.
Do you consider refinancing your property too? What are your thoughts? Please let me know in the comments below.
18 thoughts on “Refinancing My Apartment to Lower Interest Payments”
Hi Mar, je kan in de regel geen vermogen gebruiken om een hogere hypotheek te krijgen. Voor de maximale hypotheek telt alleen je inkomen en de waarde van het huis dat je koopt mee.
Als je een duurder huis wil kopen dan dat je hypotheek kan krijgen moet je het verschil zelf bijleggen. Of je dit nou doet met geld van een spaarrekening of van een beleggingsrekening maakt natuurlijk niet uit.
Wel is het zo dat beleggingen risico met zich meebrengen. Als je op korte termijn een woning wil kopen kan het dus gebeuren dat je belegging minder waard wordt.
Dit is geen financieel advies. Je bent altijd zelf verantwoordelijk voor de keuzes die je maakt.
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Nice article B. Although I am sceptical at using mortgage debt for investme ts, it is interesting at current rates.
How did your bank allow you to increase your mortgage to subtract money from it? Normally there should be an reference (onderpand) and not for consumptional use.
It’s in the article I think. I got a new mortgage at (then) 78% LTV which happened to be almost 30k above my current mortgage. So there was more than enough property value to sustain the mortgage.
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Nice article! I do have one question, though. Your loan was under the limit for Dutch “NHG”, but still you could get a lower interest rate. Normally I think you can only get a lower interest rate by decreasing your LTV if you don’t have NHG.
Did your mortgage not have NHG?
My original mortgage did have NHG, because that was the lowest interest I could get back then. There are some strings attached to the NHG when refinancing. Plus, you’d have to make a new contribution to the fund. Those things combined made me not do it. The difference in interest was also quite low (1.20% vs 1.40%).
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Hi B,
Great tip, thanks a lot. May I ask how you get
‘For 2 euros you can get the actual price for which a house was sold from the government’ information?
thanks in advance
Sure, through “Kadaster” you can download data like this (current owner, last transaction date, transaction price) etc. The costs were 2.40 EUR (not sure if that’s still the same).
Mind you: sometimes the information is not complete.
Hallo B.,
Bedankt voor je blog! Erg leerzaam!
Mag ik jou een paar vragen stellen over het herfinancieren van je woning?
Zelf ben ik met dezelfde dingen bezig (financiele zelfstandigheid, investeren, etc.) en mijn appartement is fors meer waard dan de hypotheek.
Hoe jij dat heb geregeld qua extra financiering (met lage rente) is een elegante stap.
Ok, een paar vragen die ik heb:
– Ben je overgestapt qua hypotheekverstrekker?
– Welke stappen moest je doorlopen? Net als bij een gewone hypotheek? Bijvoorbeeld een taxatierapport laten maken, hypotheekadviseur in de hand nemen?
– Hoe moest je aantonen dat de waarde was gestegen. Misschien met een taxatierapport, maar ik kan me voorstellen dat de WOZ-waarde maar langzaam meestijgt. Dat ‘drukt’ misschien de taxatiewaarde.
Ik probeer dus gevoel te krijgen of dit haalbaar is in mijn geval en waar ik tegen aan ga lopen.
Alvast ontzettend dank voor je reactie!
Hi Niels, wat leuk dat je reageert en zelf ook druk bent met je geldzaken!
Allereerst wil ik zeggen dat wat ik heb gedaan niet voor iedereen is weggelegd. Het verhogen van je hypotheek is zeker niet in alle gevallen een goed idee. Wat ik in dit artikel heb beschreven is dus puur mijn eigen ervaring, en géén financieel advies. Dat geef ik niet.
Wat betreft jouw vragen:
– Ik ben inderdaad overgestapt. Mijn hypotheekverstrekker wilde niet meewerken, dus ben naar een andere gegaan. Uiteindelijk bleek dat ook veel goedkoper te zijn (1.4% t.o.v. 1.9%).
– Omdat ik ben overgestapt naar een andere verstrekker inderdaad dezelfde stappen doorlopen. Ik heb geen adviseur in de hand genomen. Er zijn een aantal aanbieders die execution-only voor jou bemiddelen met een hypotheekverstrekker en sommige banken bieden dit zelf ook aan.
– De waardestijging hoefde ik niet aan te tonen. Ik vroeg een hypotheek aan voor het bedrag dat in het artikel staat, en moest hoe dan ook een taxatie laten uitvoeren. Deze wees uit dat de hypotheek <80% LTV zou zijn.
Of het haalbaar is ligt aan je financiën. Of het slim is om te doen ligt aan je eigen gevoel. Als je slecht slaapt bij het nemen van risico's zou ik afraden dit door te zetten. Doe alsjeblieft goed je eigen onderzoek voor je dit doet.
Succes,
B
Ik neem aan dat je rentevasteperiode voorbij was en je dus de hypotheek hebt overgesloten? Zelf zit ik bij hypotrust en die rekenen bij vroegtijdig oversluiten een belachelijk hoge boete van 27.000 euro in mijn geval. De oplossing is het huis verkopen en ergens anders gaan wonen. Dan kan je wel een nieuwe hypotheek afsluiten met lagere rente (alhoewel je natuurlijk ook kosten gaat hebben).
De boete is afhankelijk van onder andere de resterende looptijd en het renteverschil. Dat renteverschil was bij mij niet zo groot en resulteerde dus in een kleine boete (ongeveer 2000 euro voor belastingvoordeel dus zo’n 1000 euro netto). Dit was in mijn situatie de moeite waard. Dit betekent niet dat dat in elke situatie de moeite is zoals jouw 27k laat zien.
Shame on you! How about the profit of the banks? :)
But seriously, where could you get a 1.4% mortgage? Is it only 1 year fixed?
Let the banks make their profits. I’m happy with them earning a lot of money if it earns me as well.
So the mortgage is a 6 year term via Lloyds Bank (previously known as Bank of Scotland) at <80% loan to value. <90% would be 1,45%. A 10 year term is 1,95% if I recall correctly.
I don’t plan on living here for another 10 years, so the 6 year term makes sense. I’ll either sell or rent out the apartment. When renting out I have to refinance into a different mortgage anyways.
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