I’ve mentioned earlier about Dave Ramsey and Clark Howard and several other sources of inspiration for Success (both Financial and other).
One of the key ideas is being “Debt Free”. (On YouTube look up “Dave Ramsey” or “Debt Snowball” , etc).
I was Debt Free for a few years. Though about 2 years ago. I did take on a Mortgage and moved back into Debt. (At the time my “30% Ruling” (Dutch Specific) was expiring and so my take home pay would go down significantly and I had doubts about my ability to continue to afford the apartment I was living in at the time. Buying a House would allow me to significantly reduce my Monthly House expenses (approx. €500 (35% reduction)).
The other thing I knew I wanted to do from the start was to Pay Off the Mortgage As Soon As Possible. Early on I spoke to one of the Mortgage agents about this, some companies only allow people to do a Maximum 0f 20% per year. (This restriction may not apply in the US or to all Mortgage providers)
Improving the Death Pledge
The Mortgage in The Netherlands has 2 main differences from a US Mortgage.
- Payments can Drop
- Interest Rates Can Drop
These need to be taken into account when optimizing the payments and getting the best deal.
Making your Payment Smaller
If a typical Mortgage looks like this:
In the US, when an Extra Payment is made, the Time on the Mortgage is reduced:
In the Netherlands, the time stays the same but the payments are reduced:
(Not to scale).
This means that paying an extra €100, might reduce your payment next Month by €0.39. Or in 1 year €4.68. (Or you get a 4.68% saving on what you put in*). Nicer required payments are good, but the catch is, if you want to Reduce Term of Mortgage, you need to make up the difference. (By reducing the required payment, the bank keeps you on the hook for the full term of the loan). (See the example at the end)
So, over time I’ve put in a lot extra on my Mortgage and gotten my Mandatory payments down significantly at the same time I’ve also increased the amount of the extra payment. (I have a scheduled an autopayment and the last few months, I’ve tweaked it up by the amount of the decrease).
Also on payday a significant amount of my residual balance goes to the mortgage and another large part to savings.
I still pay a consistent amount (it is always more than Minimum), but getting a note from the bank and seeing my reduced required payment gives me a nice psychological boost that I AM MAKING A DIFFERENCE.
This and the ability to reduce the interest rate, have allowed me to hit a milestone.
Reducing your Interest Rate
In the US the term is Loan-to-Value. Many Dutch Mortgage companies will allow a lower interest rate, if the Loan falls below a certain Percentage of the Value. (In the US if the % falls bellow a certain Level, the Mortgagee (Death Pledger) can arrange to drop the PMI (Personal Mortgage Insurance) and save a few Dollars).
Our original Mortgage was 94% of the Value. So far we have paid down principle to about 84% of the ORIGINAL Value.
We noticed that the prices of houses in our Neighborhood have been going up. (Like €100,000 more than our house, in addition these are not houses which a “Like” our house, but they are “Clones” of our House). So we got a new appraisal on our house (in Dutch this called a “Taxatie”). Based on the new appraisal are Interest rate has now dropped to 1.9%, from 2.08%. (This is the 2nd time we’ve done this, the 1st time it dropped the rate from the ORIGINAL 2.38% to 2.08%)
By taking advantage of these to one can reduce the MANDATORY Payment.
Our Mortgage Now (a.k.a “Drumroll”)
So after almost 2 years of Extra payments, getting new appraisals to take advantage of our Houses’s increasing Value, we finally passed a Personal Milestone and reduced the Monthly Payment €100 ! (actually the payment next Month will be €115, less than our initial payment (or a 12.5% (1/8th) Discount from the Original Monthly Payment).
2 years into our Mortgage and so far we are about 2.5 years ahead on our principle payment.
Based on the latest figures and making some assumption. (Continuing to increase my monthly “Extra” to offset the reduction, applying my 13th Month to the Mortgage, etc)….. It looks like I can see the light at the end of the tunnel ……. far down the tunnel….. in about 12 years. (vs the 28 years the bank is expecting).
<If at month 165, I were to skip my ‘extra’ payment and just leave it alone, my mortgage payment to the bank would then be €2.53, for the next 16 years. Imagine telling someone “Yeah my mortgage payment is 2 and half euros” >
* Just an example.