The first thing you probably ask yourself when you decide to take out a Dutch mortgage is this: ok, so what can I afford to buy? In other words, you’re asking what your borrowing power is.
In the Netherlands, there are several things that will determine your borrowing power — and many of these are specific to when exactly you decide to take out a mortgage.
So, what’s your borrowing power in the Netherlands going to look like in 2022?
It’s a big question, so we decided to turn to the experts for an answer. We spoke with Henk Jansen from Expat Mortgages to get the best advice possible — dig in!
What is borrowing power?
As Doja Cat says, let’s get into it (yuh). Put simply, your borrowing power is the amount of money that you can afford to loan to secure a Dutch mortgage.
How this is determined is based on a number of factors:
- Your gross annual income. Yep, that’s right, gross. While only a certain amount of your income may be landing in your bank account, when calculating your borrowing power, your net income plus the tax you pay will be considered.
Why is this? Because the interest paid on a loan for a property in which you live is tax-deductible.
Good to know: If you have a partner, their income will also be considered. In 2022, it will account for 90% of the calculation.
- The term of the mortgage. How long you decide you want your mortgage term to be will also affect your borrowing power.
In the Netherlands, the standard mortgage term is 30 years. While there are shorter terms that you can choose, it’s worth noting that the shorter the term of the mortgage, the lower your borrowing capacity.
This is because you will have to pay higher monthly costs in order to pay off the mortgage within a shorter term.
- The interest rate. The higher the mortgage interest rate, the lower your borrowing capacity. If the interest is higher, less of your woonquote (income that can be spent on housing) can go towards capital repayment, so you can borrow less.
Curious as to what your borrowing power may be? You can use this mortgage calculator tool to give you a rough idea!
Changes for your Dutch borrowing power in 2022
However, as we said above, your borrowing power will also be affected by the climate in which you decide to take out a Dutch mortgage. So, what’s on the cards for 2022?
Dutch mortgage interest rates are rising
In 2021, the average Dutch mortgage interest rates stood between 1% and 2%. Now, they stand at between 2% and 4.5%.
READ MORE | The housing market in the Netherlands in 2022: to buy or not to buy a house?
Whether you land in the category of someone who will now pay 2% mortgage interest or 4% mortgage interest depends on which mortgage term you choose.
For example, are you opting for a fixed or floating interest rate? The longer you want to fix your term, the higher the interest rate. And do you want to loan the full value of the home? This will also up the interest.
On the bright side, mortgage interest is tax-deductible. However, ultimately if a higher interest rate has to be considered, your borrowing power is going to be slightly reduced.
Why are Dutch mortgage interest rates rising?
In the Netherlands, mortgage interest rates are influenced by two things:
- The loan to value ratio (LTVR) or risk category and
- The fixation period, i.e. the length of the mortgage term
The loan-to-value ratio (LTVR) sounds tricky but it’s actually quite simple.
For example: If a house is worth €350,000 and you want to take out a loan for €350,000, then your LTVR is 100%. This means that your LTVR also falls into the high-risk category.
And the result? You will have to pay higher mortgage interest, which in turn lessens your borrowing power.
The level of risk involved in loaning you money for a mortgage in the Netherlands is also increased by inflation. Something that the country has seen plenty of in the past few months.
As the cost of living rises, so does the risk involved in loaning money — which means higher mortgage interest rates.
But a good deposit could save you
On the other hand, if you decide to finance more of your bid yourself, you’ll actually benefit from better borrowing power.
For example: If €50,000 of your bid comes from your own savings, then your LTVR is only 85%.
By offering to pay more of your own contribution towards your house, you actually reduce your monthly costs, your risk category, and in turn, your interest rate. Ta-da! You would have higher borrowing power.
Lower monthly costs? Yes! You’re paying back a lower mortgage because you already partially paid for your home. On top of this, as a result of opting for lower-risk, you also benefit from a lower interest rate.
Loan more money with sustainable measures
As we all know, energy in the Netherlands is getting (much) more expensive. Henk from Expat Mortgages has seen how this interacts with the housing market.
“We see a lot of people looking for sustainable measures to reduce energy costs and be less dependent on, for example, gas.”
Not only are sustainable housing options a good move to consider when you already own a home, but also when you’re looking to buy one.
EVENT | Living sustainably: how you can finance an eco-friendly home
If you wish to make sustainable changes to the home you are interested in buying, then you actually increase your borrowing power.
In the Netherlands, people who want to take out a loan on a home that they plan on making more sustainable can actually borrow up to 106% of the value of the home.
Advice from a mortgage expert
So, what should you do with this information? The best thing is to listen to the experts — and that’s exactly what we did. Henk from Expat Mortgages has been working in the mortgage industry for nearly 30 years, here’s what he had to say.
Fixed versus floating mortgage interest rates in 2022
One thing that is certainly going to impact your borrowing power is mortgage interest rates. When considering the current mortgage interest rates in the Netherlands, it’s all about hindsight, Henk says.
He points out that yes, while mortgage interest rates have been very low over the past two years, the current interest rates are certainly higher — but they’re still average.
“Indeed, interest rates have been below 4% since 2013, and we are seeing a rise due to inflation. However, in the grand scheme of things, 4% interest on a fixed mortgage term of say, 30 years, is still very attractive and below average.”
He also points out that a floating rate is still relatively cheap at the moment, sitting at between 2% and 2.5%.
Good to know: A floating mortgage interest rate loan means that the interest rate will change slightly throughout the loan period. This change is based on fluctuations within the market.
That being said, Henk is very much aware that things in the housing market are taking an interesting turn. “In my 30 years of working in this industry, I have never seen such a large gap between the fixed and floating mortgage interest rates.”
How long do you need to fix your mortgage interest rate for?
When considering whether or not you want a higher or lower mortgage interest rate, Henk points out that it’s important to consider two things:
Firstly, higher mortgage rates mean higher monthly costs. It’s worth remembering that these are tax-deductible, meaning you have a higher tax advantage.
Secondly, a higher mortgage interest rate also means you will have a slightly lower borrowing power.
What should international homebuyers in The Netherlands consider?
“One thing that is worth considering as an international in the Netherlands is a floating mortgage interest rate,” Henk tells us. But why?
Well, as an international, you are less likely to want a 30-year fixed mortgage loan. After all, you may decide further down the line that you want to move back to your home country.
“In this case, you’re better off taking advantage of a floating mortgage loan and the lower interest rates that accompany it,” Henk explains.
This way, you can enjoy higher borrowing power when entering the housing market.
I know what I want to do, now what? Expat Mortgages have tailored their skills for internationals in the Netherlands. Reach out to them now to get an expert’s understanding of the hurdles that may come your way and how they can affect your borrowing power.
Are you an international who has bought a home in the Netherlands recently? Tell us about your experience in the comments below!