Why refinance?
People refinance to get a lower rate, to fix the rate for longer, to renovate, or because their situation changes, such as after a divorce. Whether it pays off depends on three things: the rate difference, the early repayment penalty and the costs.
The penalty: compensation for the bank
If you repay more than allowed during the fixed-rate period, the lender charges compensation: the early repayment penalty. It makes up for the interest the bank loses. The larger the gap between your rate and today’s rate, and the longer the fixed period still runs, the higher the penalty.
- Usually you can repay 10% a year without a penalty. No penalty is charged on that part.
- When you sell your home or at the end of the fixed-rate period there is no penalty.
- The penalty and the costs of refinancing are deductible.
Work out your situation
An indication based on the usual calculation. Your lender uses its own comparison rate; always ask them for the exact penalty.
Borderline
- Early repayment penalty, indication
- €14,424
- Net saving per month
- €187
- Earned back after
- 5 yr 4 mo
- Net result over 10 years
- €10,631
Includes €4,550 in advice, notary and valuation costs. Penalty and costs are deductible, so they are counted net.
Why the penalty is often disappointing
The penalty is designed to cancel out the saving you would make until the end of the fixed-rate period. The benefit of refinancing therefore lies mainly in the years after that: when you lock in the low rate for longer. If the tool shows a long break-even time, waiting until your fixed period ends may be smarter.
Alternative: rate averaging
With rate averaging you stay with your own bank. The penalty is not paid in one go but built into a new, averaged rate. You do not need to free up money, but you still pay the penalty through the rate, often with a surcharge. Whether that beats refinancing depends on your situation.
Frequently asked questions
How do I find out my penalty?
Ask your lender for a statement. Many banks also have a calculator on their website. We can request and compare it for you.
Can I refinance with the same bank?
That is called a rate change or rate averaging. It is sometimes cheaper because there are no notary or valuation costs. Always compare it with switching to another lender.
What are the extra costs of refinancing?
Count on advice and arrangement fees, a new mortgage deed at the notary and usually a valuation. Together often a few thousand euros, all deductible.
This explanation is general and not personal advice. The calculators give an indication based on the main rules; no rights can be derived from the outcome.