Mind the gap; a remortgage hack

In the current low-interest environment many people are considering to pay an interest penalty fee ("boeterente") to remortgage. We recently did the same and I was surprised by the simplicity of the calculation by the bank. Many people in the FI community aim to pay off their mortgage early and in that case there is a substantial amount of additional money coming your way that the bank seems to ignore in their calculations. 

An example; what the bank does

Let's assume someone has a 30-year annuity mortgage. The interest is fixed for ten years. After five years the remaining mortgage is €200,000. The interest rates offered by the bank are substantially lower nowadays. This person goes to the bank to calculate the interest penalty fee to be paid. You can calculate your penalty fee here. Let's assume the penalty fee is €5000. If your new, lower interest rate decreases your monthly interest payment by €200, the bank will argue you earn the penalty fee back within 25 months. 

If you fix the interest rate for longer than 25 months you should go for it! If you would fix it for 15 years (up to 2033) you'll have 155 months to benefit from the lower interest rate after the break even point. It should be said (but never is) that there is also a scenario of even lower interest in the future. In that case you have paid a fine for nothing and are again stuck with a what-turns-out to be relatively high interest rate.

That being sad, people should really check out this option as it can save you a lot of money which you can invest. In our personal case our monthly interest payments went down to €325/month. This is before the tax benefit which brings it down to approximately €200. We felt this is a no-brainer and are happy to fix this ridiculously low amount for the coming ten years. Ten years might be enough to save up enough to pay off the rest of the mortgage!

What the bank does not tell you

Back to the example mortgage. There is nothing wrong with the bank's argumentation. But there is an additional advantage if you pay off your mortgage faster than the standard 30-year plan. And it is rather big. 

Debt left when paying off €200,000 in 25 years with a 2, 4 or 6% interest rate.

In the graph above the mindset off the bank is like the majority of their customers who will remortgage and struggle for 25 more years to pay their mortgage. Afterwards the full mortgage is paid off, regardless of the interest rate. No need to take this into account in the remortgage calculations as their is no difference at the end of the full mortgage period.

Many people in the FI community are paying of their houses much faster than the standard plan.  This is where the magic happens. If someone decides 15 years from now (in 2033) to pay off the remainder of the mortgage, there is a gap in what you owe the bank depending on the interest rate you paid along the way. This gap between 2 and 4% interest is €12,000 and that amount roughly doubles looking at 2 and 6%. 

This is awesome! By paying less interest for 15 years you end up in a situation where you owe the bank less. If this is not win-win I don't know what is!