In a previous article I mentioned that a lot of consumers went to their bank last year in 2019 and at the beginning of 2015 to either apply for a mortgage or refinance. For the most part it is about refinancing whereby the consumer switches to a home loan with a lower interest rate. This causes a loss of income at the banks.
Refinancing: the reason
The Flemish government announced in July 2019 that the tax benefit of the housing bonus would be greatly reduced for all mortgage contracts concluded in 2015. A large number of consumers have tried to purchase a property before 2015 and to arrange their mortgage loan on time. Another group of consumers saw their need to review their home loan and possibly take out a better credit.
In addition, there was a clear fall in interest rates, as a result of which the income from savings tumbled.
Refinancing: how does it work?
In Belgium, every customer has the right to pay back the loan quickly. This is only possible if he pays the RE-INVESTMENT FEE. The reinvestment payment is a type of fine that is paid because the banks lose interest as a result. This reimbursement corresponds to 3 MONTHS INTEREST EXPENSES on the outstanding amount. There are also some file costs involved. With this calls internal financing or arbitration.
However, if you decide to pay off the loan early and switch to another lender, you pay more costs. People actually opt for a new mortgage loan, which means you pay extra registration fees and the notary fees for the mortgage deed. So if you are satisfied with the bank where you are a customer, it is better to stay with that bank.
The consequences for the bank
The applications for refinancing started to increase considerably in July 2019 last year. A tidal wave of refinancing applications followed. The figures from bank or the professional association of the credit report that 13.3% of the entire mortgage turnover has been refinanced. That is very high. In normal years this percentage is only between 3% and 5%. This means that about 2/3 of the consumers went to the bank for refinancing and only 1/3 wanted to take out a mortgage.
In the first place, these refinancing operations provide the banks with an additional return in the short term through the payment of the reinvestment fee. The banks see their income fall in the long term because interest income falls in the long term and these cannot be offset by the reinvestment fee. For example, Good Lender has an additional income of 69 million euros, while the loss due to the fall in interest amounts to 70 million euros per year for the remainder of the mortgage.
- This is partly due to the continuing fall in interest rates. Two years ago the interest rate was still around 4%. This has now fallen between 1.5% and 3%. The cost of the liabilities remains unchanged.
- The Belgian used to opt for a fixed interest rate. Now a variable interest rate is chosen with an initial period of 10 years or more. The interest income therefore remains low.
Solutions for the banks
- Some banks try to compensate for the loss by attracting more home loans.
- Some banks limit the loss by taking the added value in the investment portfolio.
- The bank is in favor of increasing the reinvestment payment to 6 months instead of 3 months.
- Another proposal is to increase the risk premiums for contracts with a fixed interest rate.
- Some banks want to raise the prices of their services.