A relatively new phenomenon in the world of finance is the so-called interest rate mediation. This refers to (mortgage) loans with a fixed interest rate for a specific period (fixed-rate period). In times of (sharp) falling interest rates, borrowers naturally look forward eagerly to the end of a current fixed-rate period. Anticipating this, a number of lenders offer the option of interest rate averaging. Interest rate averaging is only possible with your own lender. If you switch to a new lender, your previous lender will want to collect the interest penalty immediately.
Interest rate averaging involves terminating a current fixed-rate period and starting a new one. Naturally, terminating a current fixed-rate period generally entails the payment of a penalty interest charge. The borrower does not have to pay this penalty interest in a single lump sum; instead, it is spread over the new fixed-rate period by converting the penalty interest into a mark-up on the interest rate for the new fixed-rate period. In addition to this mark-up, lenders often apply other mark-ups, such as a mark-up to cover the risk of early full repayment of the loan upon the sale of the collateral (the property is often the collateral for a loan via a mortgage). Furthermore, a number of lenders charge administration fees, and where a mortgage adviser is involved in the interest rate averaging process, they will also charge fees.
Whether interest rate averaging is a viable option, compared with other ways of reducing monthly repayments, naturally depends on each individual’s circumstances. Another important factor here is the deductibility for income tax purposes of the costs associated with interest rate averaging, in the form of mortgage interest or property-related expenses. In responses to parliamentary questions, Finance Minister Dijsselbloem has stated that fees relating to the provision of the principal amount of the loan (including penalty interest, even when this is spread over time) are deductible. Charges relating to other rights and obligations with independent significance must be treated as non-deductible costs (an example of such a charge is the surcharge for the risk of early repayment). This separation need not be made provided that the total of all surcharges does not exceed 0.2% points. However, in the case of interest averaging, the total of the surcharges will generally be higher.