When Is It Worth Refinancing Your Loan?

If you took out a loan at a fixed interest rate in 2023, there’s a good chance you can soon secure a much more favorable loan. However, refinancing isn’t free, so when is it worth the hassle?

Recently, it wasn’t uncommon to get a twenty-year loan at around 4% or more. The high interest rates on home loans were due to inflation and the European Central Bank’s efforts to slow down the economy. As a result, interest rates increased significantly, affecting mortgage rates.

Now, the worst seems to be over, and interest rates have dropped a bit. But when is the right time to refinance?

Refinancing involves replacing your current mortgage with a new loan at a lower interest rate. The outstanding capital on your old loan is paid off in one go, and you take out a new loan for the same amount.

You often hear the rule of thumb that refinancing becomes interesting once the interest rate has dropped by 1% or more. Unfortunately, it’s not that simple. To assess the benefit, you also need to know how long the loan still has to run and how much you have already paid off. If you’re close to paying off your house, a 1% difference won’t outweigh the costs. Conversely, with a long loan term, a difference of 0.20% might already be worth considering. That’s why online simulation tools that tell you if refinancing is worthwhile are often useless. Every case is unique. At hypotheek.winkel, we offer personalized advice for free to anyone considering refinanci

A new loan means new conditions. The interest rate will be lower—that’s why you’re doing it—but the term might also differ from the old one. If you choose to keep the monthly payment the same, the new loan will end sooner. That’s obvious, since the total cost is reduced by the lower interest rate. You can also keep the same term and pay less each month. There’s no one-size-fits-all solution. For a simulation, you can always come to hypotheek.winkel.

You can also approach another bank if their interest rates are lower. This is called external refinancing. Remember that the new bank may have other requirements, such as a checking account for your salary deposits and new insurances. They want more than just a finger; they want your whole hand. So, comparisons are necessary.

When refinancing with your own bank, you pay file fees and a reinvestment fee. This is essentially a penalty for paying off the old mortgage early. The fee is legally capped at a maximum of three months’ interest on the remaining capital. So, the longer you’ve been paying, the lower the reinvestment fee.

Refinancing with another bank will cost more. You’ll also need to go through a notary. The mortgage with the old bank must be canceled, and the new one registered, which requires a notarial deed and is expensive. Sometimes a new appraisal is needed, adding to the cost. Whether you switch banks or not, you’ll always have to pay file fees.