Calculate your mortgage
Taking out a mortgage is probably the most important and influential loan you will ever take in your life. Because it is a huge amount for most people, the potential consequences are considerable. The size of the mortgage has a direct effect on the amount of money that you can spend each month. Furthermore, a bad mortgage can continue to haunt you for the rest of your life in the form of debts. But if you take out a mortgage at the right time, it is a lifelong bonus.
Regarding the value of houses, it is certainly not fairly regulated in the Netherlands. That is because the average price of a house has risen enormously in the last twenty years. While an average house in 1995 still cost one hundred thousand euros, five years in 2000 this had already risen to two hundred thousand. A doubling so. In 2008, just before the crisis, a house even cost two hundred and fifty thousand euros. This huge increase actually means that the people who bought a house around 1995 for a tonne can now sell it for more than double. They then get the extra tons completely ‘free’ due to the increase.
The people who are poorly finished are the people who bought a house between 2005 and 2008. They have, in proportion, paid the highest price for their house and on average also have higher mortgage rates. So they have to pay a higher price on their loan, which is also bigger for the same product. In practice, this means that such a person can easily pay two or three times as much as a homeowner from 1995. Starters who have bought a house around this time are the losers. They basically pay for the homeowners’ profit for them, without having a good chance of selling it for themselves again.
When taking out your mortgage, this historical story is certainly important to be aware of. Also because you will probably need an average of 30 years to pay off your own mortgage. That is a very long period, when everything can happen historically. The question is whether you are lucky (1995) or bad luck (2008). Unless you have a good knowledge of economics, you are probably unable to predict this properly. In fact, nobody can look into the future for thirty years and know exactly what will happen during that time.
Risks for the bank
For a bank, providing a mortgage is therefore also a risky affair. Something they fully experienced during the 2008 crisis. If the banks were not saved by the government, most would probably have fallen because they had misinterpreted the risks on their loans. In the meantime, the standards with which banks calculate their risks have been substantially tightened and they generally provide less high mortgages, up to four times your annual wage. For a modal earning family that together earns around 45,000 euros, this means a maximum mortgage of around 180,000 euros. That is lower than the average price of a home.
The economic tide therefore certainly influences the calculation of your mortgage. Yet there are also a number of fixed variables that apply to it. Of course, a number of points that a bank will always look at is your salary. In addition, it is cheaper to have an employment contract than to be self-employed. In that case, you actually have to make a decent profit from your business for at least three years to be eligible for a mortgage. Most banks take the average of the past three years. If there was a bad year by chance, then that has major consequences for the amount that you can borrow.
Another point that is becoming increasingly important is bringing your own money. Of course you don’t have to borrow all the money you have. In the Netherlands this is actually not that common and most people borrow the full amount they need. The rules are often much stricter abroad. In Germany, for example, you have to finance no less than 30 percent of the purchase price of a house yourself. With a two-tonne house, this amounts to sixty thousand euros. That is a considerable amount to save yourself. However, this ensures that there is a healthy buffer if the house price should suddenly fall. Then you lose money, but you are not left behind with debts.
Another important aspect for calculating your mortgage is the state of the house that you are buying. You can buy a complete building site for one hundred thousand euros and easily take out a mortgage for it. But if you know at the same time that you will then have to invest another hundred thousand euros to make it habitable, then you should actually include this amount in the mortgage. Otherwise you might get into financial difficulties quite well. In such a case it is very important to also have an appraisal of what the house will probably be worth after the renovation. If you do it right, the house is worth even more than the purchase price and the renovation costs.
Long term vision
After all, buying a house is primarily a long-term investment and therefore requires a vision for at least ten years. If you don’t have one, renting a house might be smarter than buying one. A rental house has a number of advantages, of which flexibility is definitely the greatest. If you want to move, you just have to cancel the rent and you are free to go. Nevertheless, a house for sale has a big advantage. Provided that the house price remains stable, a house for sale also serves as a piggy bank. With a rental house the money for the rent to someone else disappears, but with a house you save the money for later as it were. The only thing that starts from that is the money you pay in mortgage interest, but that is of course always much less than an average rent.