When you buy a house or refinance an existing mortgage, you generally ponder: Floating or fixed? What maturity? Then you shop around with different banks.
Now let’s look at the current mortgage rates offered by MoneyYou (ABN affiliate) as of today, 24-April-2016.
Presented with the above options .. the intuitive thing to do is to choose 5, 10 or 20 year fixed rate. Why pay MORE for a floating rate (2.1%) than for 10-year fixed (1.99%)… Not to mention the additional benefit of certainty and less anxiety about future rates. If anything you’d expect to see floating rates to be lower, not higher. No wonder that 95%+ of Dutch people do exactly that, lock-in long term mortgage rates. But are we making the right choice?
Ask yourself, what’s the catch here? Why are banks doing this? We know they’re not stupid. They generally build these tables so that it maximises profits, they use behavioural economists who understand how our brains work and how to trick us into selecting the option that maximises their profits. Not passing any judgment here, that’s just the way the world works. They also know we hate uncertainty and are willing to pay a premium to sleep better. That’s why insurance business exists, that’s why we accept selling our time for a fixed salary, etc.. so banks essentially sell us fear – and we can’t get enough of it.
So Dutch banks artificially inflate the floating rate – making it less attractive – so that you think you’re getting a good deal by locking in rates for 10-20 years. Banks know full well rates will stay low for decades to come. As debt grows, rates have to come down to make debt serviceable. If you want to look at the future, look no further than Japan where 10 year yields are -0.14%, insane for a country with 250% debt/GDP. But there’s no alternative, its the only way to keep the system going.
That explains why Dutch people are paying on average 4% today for their mortgage – way above the current 2% rates. They locked in rates between 2006-2009 for 10+ years – when mortgage rates were sky high. Assuming a 300,000 EUR average mortgage, this means we’re throwing 500 EUR a month out of the window for the benefit of Dutch banks (some of this splurge is partially tax deductible, but still..). You see why banks make money? Because they understand how our brains deceive us.
What you did NOT know is that in Portugal the average mortgage rate is 1,163%. Yes, you read correctly, 1.163%… How is it possible that the citizens of a semi-bankrupt country pay 1.163% and those of the Netherlands pay 4%? If anything the Dutch citizens should pay far less than the Portuguese, not 3.5 times more!!
The reason is that Portuguese people choose floating rate whereas Dutch people keep preferring long term fixed rates. Not sure why that’s the case, probably has to do with some routed historical & cultural reasons. Portuguese/Spanish may be more ad-hoc, more “go with the flow” people whereas Dutch/German prefer certainty.
But why do Portuguese banks offer lower floating rates than Dutch banks? And how do Dutch banks actually calculate the floating rate? I asked Rabobank last year .. but they told me they couldn’t disclose that information .. that it was proprietary information. Hum .. smart from them. Why would they give away a secret formula that hands them free money – 500 EUR / month per mortgage holder?
Bottom line: Don’t be a fool by locking in rates for long periods. Understand life is a risk in itself and trying to protect the downside only impoverishes you and your family.