Bring your next interest rate adjustment forward?

20 April 2020

Recently, someone asked me if it is useful and sensible to bring an interest rate review forward by 7 years. Of course with the additional question what in that case the prepayment penalty to be paid would be “net”.
The client knew that, compared to the current mortgage interest rates, he was on the high side with an annual mortgage interest rate of 4.5% and that in the coming years the maximum tax deduction of now 46% will be gradually reduced to 37.05%.
Roughly speaking, as a mortgage advisor, you can immediately say that paying the penalty and choosing a low mortgage interest after tax will yield positively. After all, the penalty is deductible at 46% and if the high mortgage interest continues, the loss of interest deduction becomes significant.
However, the client wanted a more precise answer to the question of what the penalty would cost him after taxes.
My financial planning software gave the answer.
I compared the scenario without a penalty with the scenario after payment of a penalty and I could deduct the difference in income tax from the penalty. It was immediately clear what the penalty after deduction of tax would cost.

After that, the client could act and call the bank to revise the interest in this case for 2.45% and 20 years fixed. This immediately ensured that there would be no risk in 7 years of running into higher mortgage interest rates.

This way, as a financial advisor, you have some satisfaction in your profession.

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