Buying a home: which mortgage is right for me?
Many dream of owning a home. Comparis outlines what's important when deciding on the right mortgage strategy.
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A mortgage must fit like a bespoke suit. Comparis outlines what's important when deciding on the right mortgage strategy for you.
Everyone wants to keep costs as low as possible when financing a home, but focusing on costs alone can mean financial disaster later on. Start by finding out which risk type you are.
You can work out your mortgage strategy by answering the following three questions: how much risk am I willing to take (appetite for risk)? How much risk am I able to bear (tolerance of risk)? How much flexibility do I need? These three questions can be answered as follows:
Risk-averse: I like to be on the safe side and want to budget for the long term with stable interest rates.
Risk-taker: I am happy to take risks, and willing to keep a close eye on the mortgage market.
Risk-tolerant: my financial reserves are enough to maintain my usual standard of living, even if interest costs rise.
Risk-intolerant: I may no longer be able to afford the property if interest rates rise.
Great need for flexibility: I want to be able to sell my home at any time.
Little need for flexibility: I want to continue living in my home for the long term.
| I need flexibility | I don't need flexibility | |
|---|---|---|
| Risk-averse and risk-tolerant | Risk type 1: fixed-rate mortgage with exit option or Saron | Risk type 2: long-term fixed-rate mortgage |
| Risk-averse and risk-intolerant | Risk type 3: fixed-rate mortgage with exit option, otherwise better to rent | Risk type 4: long-term fixed-rate mortgage |
| Risk-taker but risk-intolerant | Risk type 5: fixed-rate mortgage with exit option, otherwise better to rent | Risk type 6: long-term fixed-rate mortgage |
| Risk-taker and risk-tolerant | Risk type 7: short-term fixed-rate mortgage or Saron | Risk type 8: any option depending on interest rate expectations and interest rate differentials |
Risk type 1
You are averse to risk, but your financial reserves give you a certain tolerance. You also want to ensure a degree of flexibility. With this mix of needs there are basically two financing options:
Fixed-rate mortgage with exit option: many customers do not realize that certain lenders offer fixed-rate mortgages with low-cost exit options if you sell the property. This product allows you to take on a mortgage with budgetable costs, while keeping some flexibility. Our mortgage broker HypoPlus will be pleased to help you arrange your mortgage.
Saron mortgage: unlike fixed-term mortgages, Saron mortgages are exposed to interest rate risks. However, you can ease worries about rising interest rates by taking out a Saron mortgage with a short-term framework contract. Depending on your circumstances in the future, you can let the Saron mortgage expire and sell your home. You can also extend this type of mortgage again, or convert it into a fixed-rate one.
Risk type 2
You don't like taking risk, but even after financing your home you still have a financial cushion. You're also planning to stay in your home for a long time. With these factors in mind, it is worth taking on a long-term, fixed-rate mortgage.
Risk type 3
You have little appetite for risk, and after financing your home you will not have much of a financial cushion. You also need a great deal of flexibility. In a situation like this you might think twice about buying a property. Renting would be better suited to your needs.
Alternatively, you could take out a fixed-rate mortgage with exit options (see risk type 1).
Risk type 4
You don't want to take more of a risk than absolutely necessary, and you will not have much of a reserve left after financing your home. You are planning not to sell your home for many years. A long-term fixed-rate mortgage best meets your needs.
Risk type 5
Although you would be willing to take a risk, you have maxed out your finances and have little room to manoeuvre. What's more, you don't want to be tied to a home in the long term. In this case you should think carefully about whether to buy a property. Renting would be better suited to your needs.
Alternatively, you could take out a fixed-rate mortgage with exit options (see risk type 1).
Risk type 6
You are not averse to the risk of rising interest rates, but are pushing your limit when it comes to affordability. However, you're planning to stay in your home for a long time. With these factors in mind, it is worth taking out a long-term fixed-rate mortgage.
Risk type 7
You are a risk-taker who can also tolerate that risk, but a long-term commitment to living in the same place is not what you need. There are basically two financing options here:
Short-term fixed-rate mortgage: fixed-rate mortgages with short terms of one to three years provide greater flexibility than the medium to long-term options. Your tolerance of risk allows you to bear higher refinancing costs if interest rates are higher when the mortgage expires.
Saron mortgages: risk type 7 also allows for financing with a Saron mortgage. You secure flexibility with a short-term framework contract, which you can extend for as long as you like when it expires.
Risk type 8
You are a risk-taker who can also tolerate that risk, and you want to stay in your home for the long term. With this mix of needs you can pick any financing option, choosing your mortgage according to how you expect interest rates to develop. Risk types 1 to 7 are a different matter. In these cases, your choice of product is determined by your individual appetite for and tolerance of risk, as well as your personal circumstances.
Should I split my mortgage into multiple tranches?
Banks typically recommend splitting mortgage debt into multiple tranches with different repayment terms. This has the advantage that the borrower does not have to renew the entire mortgage at once, and can therefore respond more flexibly to changes in interest rates or circumstances.
That said, when renewing an expiring tranche the customer cannot simply switch to a lower-cost lender. The sector does not allow you to move your entire mortgage to a new provider unless you place all of the tranches with the new bank within two years. Anyone who decides to split their mortgage is therefore at the mercy of their current bank's terms.
Read more about splitting your mortgage into tranches.
What about interest rate forecasts?
Where you expect interest rates to go also influences your choice of mortgage strategy. Fixed-rate mortgages are advisable if you think interest rates are likely to increase in the long term. If you believe that they will fall or remain stable, then Saron mortgages are a good choice. Find out here about the forecast for mortgage rates and their trend in recent years.
Please remember, however, that in principle only those who are risk type 8 can afford to examine all of the financing options and take the one that best suits their view of interest rates. In all other cases, the deciding factors are the individual's appetite for and tolerance of risk, as well as how much flexibility they need.
Whatever your circumstances, never rush into taking out a mortgage. Get advice and compare different financing packages. Our mortgage broker HypoPlus will be happy to help.