How to weigh financial decisions

I wish I could say I made my financial decisions with a cool rational mind, but I guess the truth is that most of my financial decisions are emotional ones and not rational ones. And that is because I have a hard time weighing the pros and cons. I have no idea how I should go about that rationally, so most of the time I just chose what feels best.

And most of the time it sort of works, so I don't think often about this. However, the last two or three months we have been busy with refinancing our mortgage. The idea to do that first came a little before the war in the Ukraine started. Even then it was already apparent that the mortgage rate in the Netherlands would probably start to rise from its all time low. And with the idea to perhapd refinance our mortgage, came the question: is it wise to do so?

We bought our house 12 years ago. The mortgage was for one half rate-only and the other half was a savings mortgage, meaning that we payed rent and a premium that would be invested and after 30 years would be worth (guaranteed) that part of the mortgage so we could pay it off. In the almost 12 years since we bought the house we not only payed the rent and the premium, we were even able to repay a part of the half of the mortgage that was rate only.

As we life in the Netherlands, value is expressed in euros. The mortage we had, costs us 950 euros per month. As we had already payed of part of the rate only half of the mortgage, in 18 years (a mortgage has a duration of 30 years in the Netherlands) we would be able to pay of half of the mortgage and would be left with a debt of 80,000 euros. And all that time we would have payed at least 950 euros per month. I say at least, because the actual monthly sum is higher than 950 euros but can be partly reducted from taxes. The part that can be reducted will become smaller in the years to come. So what we pay per month would in the next 10 years probably rise to some 1250 euros.

As we had already repayed part of the rate only half of the mortgage and because there was already quite some value in the savings half of the mortgage, we had to refinance 200,000 euros. Our house is worth considerably more than that, so the complete sum can be borrowed as a rate only mortgage. A new mortgage of 200,000, against the interest of about two months ago, will cost us less than 450 euros a month.

And that was the choice. Pay 950 euros a month, climbing to 1250 euros in 10 years and have a remaining debt of 80,000 euros in 18 years. Or pay 450 euros a month, climbing to a little over 500 in ten years and have a remaining debt of 200,000 euros in 30 years.

The short term advantage is obvious: pay 500 euros less every month for the mortgage. In the long term, however, there is a disadvantage. After 18 years we've payed 108,000 euros less for the mortgage. At that moment however, we still have a debt of 200,000 where we would have had a debt of 80,000 euros. On the plus side: during those 18 years we can spend the 108.000 euros on other, perhaps essential things. On the down side: after 18 years we stil have to pay the monthly rent for 200.000 where we could have had a new mortgage of only 80,000 with perhaps lower monthly costs.

Now, what is rationally the financially sound decision? I have no idea how I can weigh rationally the short term advantage against possible future advantages or disadvantages. So the decision became a rather emotional one. We love this house and we want to stay here. And with 500 euros less to pay each month, we are better prepared for possible decline in income or substantial rises in the costs of living here (for example the energy costs which have almost tripled in the last 6 months). And so we decided for the new mortgage.

In 18 years time we will know whether the choice to refinance our mortgage really was a good decision.

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