Penalty interest for refinancing mortgage or overpayments
If you want to repay or refinance your mortgage early, you sometimes pay penalty interest. Penalty interest is also called ‘compensation for early repayment’. This fee covers the interest income lost by the mortgage lender if you repay the loan early.
Penalty for refinancing your mortgage
Thinking about refinancing your mortgage? There is a good chance you will have to pay a penalty. This is because the bank loses income when you refinance early. To compensate for this, you will need to pay a penalty fee. The amount of this penalty depends on several factors:
- The interest rate you currently pay versus the interest rate at the time of refinancing.
- The size of your mortgage (the higher the mortgage, the higher the penalty interest).
- How much you are allowed to repay penalty-free each year.
- The remaining fixed-interest period (the longer it is, the higher the penalty interest).
Penalty for making additional mortgage repayments
Each year, you can repay a percentage of your mortgage principal without a penalty. Usually, this is between 10% and 20% of the principal. If you exceed this penalty-free amount, you may have to pay a penalty interest. Some mortgage lenders state in their terms that no penalty is charged if you repay the mortgage using your own funds.
Penalty-free repayment
If you choose to repay your mortgage early, you typically pay a penalty, but in some cases, this does not apply. Your mortgage terms or mortgage deed will specify when you can repay penalty-free or even pay off the entire mortgage at once.
You can usually repay penalty-free in the following situations:
- At the end of your fixed-interest period.
- When selling your home.
- In case of a foreclosure sale.
- If your property is destroyed.
- With a payout from a life insurance policy.
- If the current daily interest rate is higher than your contracted rate.
- If your lender allows unlimited repayments from your own funds.
How can I calculate the penalty interest?
Your mortgage deed states the percentage of your original mortgage sum that you can repay annually without extra costs (usually 10%). Subtract this penalty-free repayment amount from your remaining mortgage balance. The penalty interest is then calculated on the remaining amount.
The difference between your fixed mortgage interest rate and the current mortgage rate determines the penalty for early repayment.
Is the penalty interest tax-deductible?
Yes, in most cases, the penalty for refinancing your mortgage is deductible in your income tax return. Check the website of the Dutch Tax Office for more details on whether your penalty interest is deductible.
Calculating penalty interest: example
To explain how much penalty interest you pay when making an extra repayment on your mortgage, we have created an example calculation.
You took out an interest-only mortgage of €200,000 on 1 January 2012 at a fixed interest rate of 5.4% for 15 years. In 2022, you want to repay €25,000 on the loan. The comparable interest rate is 1.4%. Since the market interest rate is lower than the rate you are paying, you are required to pay penalty interest.
You are allowed to repay 10% of the principal amount per year without penalty. You have not made any repayments on your mortgage in 2022. Therefore, you can repay €20,000 penalty-free and will only owe penalty interest on the extra repayment of €5,000.
The penalty interest is calculated based on the interest difference over the remaining fixed-interest period. In this case, the penalty interest can be estimated as follows:
5.4% - 1.4% = 4.0% on €5,000 = €200 interest difference.
€200 / 12 months = €16.67 per month over the remaining 54 months = €900 penalty interest.
You can also choose to repay €20,000 in December 2022 and the remaining amount in January 2023 (when a new year begins). This way, you avoid the penalty clause.