Mortgage and the mortgage interest
Until 2008, there were few non-economically educated people who were interested in something dull like mortgage interest. Why would you too. Interest rates have fluctuated back and forth for years, but in the end it was not about that. After all, the average price of a house has been rising for years, so how much risk could you run with a slightly higher interest rate on your mortgage?
Well, quite a lot. Because the housing market performed so well until 2008, many banks had no problem providing so-called ‘top mortgages’ to people who wanted to buy a house. This went up to even 125% of the value of the house. So the whole value, plus a quarter more. In addition, the interest that you had to pay on this amount increased from less than four percent in 2005 to more than six percent in 2008. Ultimately, this turned out to be a ticking time bomb that went off with a big bang at the end of 2008. Suddenly, confidence was gone and the housing market. The prices fell enormously and the mortgage interest also collapsed.
Consequences of the crisis
The consequences for people who had just taken out a top mortgage the year before were enormous. They still had to pay a lot of money in interest, while the value of their house was suddenly a quarter lower. Instead of over 125% of their value, they suddenly paid about 150% of the value. A huge extra amount. In addition, houses were for sale for a very long time before they were sold, and that meant that the owner also had to wait a very long time before he could buy a new house again. It caused a huge ‘traffic jam’ on the market.
Of course, this did not necessarily lead to major problems. In principle, most people with a top mortgage could continue to pay for it. They had lost a lot of money on paper, but in practice it didn’t matter. As long as they could continue to pay for everything. Unfortunately, with the collapse of the housing market came the economic crisis. Many people were fired and therefore unable to pay their monthly charges. What was often left was a forced sale of their house. After such dramas, people were sometimes left with a huge debt of tens of thousands of euros and no work.
Friend or enemy
The mortgage interest can therefore be your friend or foe. The moment you take out a mortgage when it is high, you take a risk. In principle, the bank of course knows this well. Since they provide the money, they must be aware of the chance that they will get their money back. After the crisis, banks have therefore logically become much stricter in providing mortgages. Something that certainly made the housing market crisis even worse in the short term. Certainly for starters, people who wanted to buy their first house, the new rules created many problems. The amount they could borrow for a mortgage was suddenly much lower than before.
But when the mortgage interest is very low, he can also be a friend. At many banks you take out a mortgage in parts. One for five years, another for ten years, or even twenty-five or thirty. At the end of these five or ten years, you must close the mortgage. That actually means that you will have to negotiate with the bank again for a new mortgage for a new period. If you are lucky then the interest is a lot lower than with your first mortgage and therefore you have money left over. But if you are unlucky and the interest is higher, it can also happen that you suddenly pay more.
Historically, mortgage interest rates have been falling since the 1980s. That is also not that difficult since the interest rate around 1980 was around thirteen percent. Compared to that, the six percent of 2008 was not that bad. If you buy a house on this land, in principle you should always end up with a slightly lower interest rate in the future. The question is of course to what extent this movement will continue. The mortgage interest depends on quite a lot of factors.
First, of course, you have your personal factors. They mainly have to do with the amount of risk that the bank runs to provide you with a loan. For them, the question is always how likely it is that you will repay the entire amount to them. Of course there is never a hundred percent certainty, and the bank will therefore mainly try to keep the risks as low as possible. The big difference between banks before and after 2008 is that their definitions of ‘risk reduction’ are now much tighter. Important things here are of course things like your salary and income. The moment you have a job with a permanent contract and a good working history, this helps enormously. However, if you are self-employed and your income fluctuates every month, this usually causes problems. The bank is then less confident that you will always be able to repay the mortgage.
In addition, there are a good number of other factors that also determine the level of the mortgage interest. This is because interest is almost always linked to the development of the housing market. Is the average price of a house rising? This means that there is a lot of demand for houses and therefore also for money for a mortgage. With typical market forces of supply and demand, this means that the interest that you will have to pay on a mortgage also rises. If there is little demand for houses, this will in principle also ensure that interest rates will drop. So the best time to buy a house is when nobody wants to buy a house.
The central bank
Then there is one last important player on the market. That is the European Central Bank. This is the institution where the banks borrow their money. And they also pay an interest rate to the bank here. If this percentage is very low, it is therefore very cheap for banks to borrow money and can therefore offer sharper interest rates to their customers. For the European bank, this is again a means to boost the economy and, indirectly, also to inflation.