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Which fixed-rate period should you choose? It’s a standard question when taking out your first mortgage, and it’s probably something you don’t know much about yet.
It’s quite a complicated topic, which is why we’re happy to help you with it.
What are the advantages and disadvantages of a fixed-rate period of 5, 10, 20 or 30 years?
And which fixed-rate period fits your situation best?
We’ve listed everything you need to know to make the right choice.
What is a fixed-rate period?
The fixed-rate period is the period during which your mortgage interest rate remains unchanged.
When you take out your mortgage, or when your current fixed-rate period expires, you choose how long you want to lock in your interest rate.
During that period, your interest rate won’t go up or down, regardless of how market rates change.
Instead of a fixed-rate period, you can also choose a variable interest rate: in that case, you continuously pay the market rate that applies at that moment.
If you choose a fixed-rate period of 10 years, it means you’ll pay the same interest rate for 10 years.
So if interest rates are currently low, you’ll benefit from that low rate for 10 years.
If interest rates drop significantly in five years, you won’t benefit from that decrease. You would have benefited if you had chosen a five-year fixed-rate period earlier.
Choosing a fixed-rate period is always a bit of a gamble, because you can never be certain how interest rates will develop.
Which fixed-rate period should you choose for your mortgage?
In most cases, you can assume that the shorter your fixed-rate period is, the lower the interest rate you pay.
Still, a short fixed-rate period isn’t always beneficial. If interest rates rise sharply, you’ll feel the impact immediately once your fixed-rate period ends. You’ll start paying more interest right away, and that can take a big bite out of your monthly budget.
With a longer fixed-rate period, you would have been able to benefit from the current low interest rate for a longer time.
If the expectation is that interest rates will fall, a short fixed-rate period can be an interesting option.
You’ll benefit from that decrease. You can also choose to lock in your interest rate later on, once rates are lower.
When choosing your fixed-rate period, it’s important to look at factors beyond just the current interest rate.
Taking the size of your mortgage into account
The size of your mortgage is something to take into account when determining your fixed-rate period.
Is your mortgage relatively high compared to your income? Then a short fixed-rate period can be risky.
If interest rates rise after your fixed-rate period ends, you may run into trouble paying your monthly costs once that period is over.
What are the expected interest rate developments?
Expected interest rate developments also play a role.
Is the expectation that interest rates will fall or remain stable in the coming years? Then it can sometimes be smart to choose a short fixed-rate period so you can benefit from the lower rates afterward.
Is an increase in interest rates expected? Then a longer fixed-rate period may be more favorable. You’ll know for sure that you’ll be paying the same rate for a longer period.
Dive into the interest rates
It’s also important to look at the difference between the interest rates for a short versus a long fixed-rate period.
Sometimes the difference can be several percentage points, but there are also times when the differences are very small. If the difference is small, a slightly longer fixed-rate period is often beneficial.
How long will you stay in your home?
Finally, it also matters how long you expect to stay in your home.
Because interest rates for longer periods are often higher, it can sometimes be disadvantageous to keep paying that higher rate longer than necessary.
If, for example, you expect to stay in your new home for no longer than five years, then a long fixed-rate period — such as 20 years — isn’t always beneficial.
Once you move, your situation usually changes. As a result, it may be more practical to repay your current mortgage and take out a completely new one.
On the other hand, by taking your mortgage with you, you can carry your current interest rate over to your next home.
If interest rates rise significantly within those five years while your current rate is low, it may still be smart to choose a 20-year fixed rate.
Fixed rates of 10 years or more
When interest rates are low, many people choose a fixed-rate period of 10 years or more.
You can then lock in the low mortgage rate for a longer period. Regardless of the current interest rate, a longer fixed-rate period gives you certainty about your monthly payments.
You already know exactly how much interest you’ll be paying in the coming years. If interest rates rise further, you won’t notice any of it in your monthly payments during that period.
Fixing your interest rate for 20 or 30 years?
When interest rates are low, people often choose to fix their rate for a longer period. You can choose, for example, 20 or 30 years. The choice between a 20-year or 30-year fixed-rate period can be quite difficult.
With a 30-year fixed-rate period, you have complete certainty until the end of the mortgage term. However, you’ll also pay a higher interest rate and may be able to borrow less.
With a 20-year fixed-rate period, you have the option to switch to another mortgage without penalty after 20 years, and you may pay less interest and sometimes be able to borrow more.
You do run the risk that interest rates will be higher after those 20 years. In that case, you’ll be locked into that higher rate for the entire new fixed-rate period.
On the other hand, interest rates may also fall. In that case, it’s actually an advantage that after those 20 years you’ll start paying the current, lower rate again.
What happens after the fixed-rate period?
When your fixed-rate period ends, you can choose a new fixed-rate period.
You’ll be informed by your bank at least three months in advance that your fixed-rate period is ending. The bank will often offer you the option to renew your mortgage with them, but it’s definitely worth checking whether other mortgage providers are offering better rates at that moment.
At the end of the fixed-rate period, you can switch your mortgage to another lender without paying a penalty. Sometimes another mortgage provider may offer you a better deal, and refinancing can save you a lot of money. Definitely worth looking into!
The importance of a good mortgage advisor
Because it’s a complex topic with many variables, it’s wise to find a good mortgage advisor who can inform you and talk through all the pros and cons with you.
This way, you can make a well-considered choice for the next 5, 10, 20 or 30 years.
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