Mortgage interest deduction: how exactly does it work?
The mortgage interest deduction is an important part of the Dutch tax system for homeowners. Over the years, the scheme has become more complex due to legislative changes and additional rules. This article explains the basic elements of the scheme.
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How does the mortgage interest deduction work?
The mortgage interest deduction means that the interest you pay on a loan for your primary residence (the so-called home acquisition debt) can be deducted from your gross income in Box 1. This deduction lowers your taxable income, meaning you pay less income tax.
To offset this, there is the imputed rental value (eigenwoningforfait): an addition to your income because you own a home. The imputed rental value is a percentage of the property value (WOZ value) of your home and actually increases your taxable income.
Simplified calculation example
Starting points:
- Gross annual income: €100,000
- Property (WOZ) value: €600,000
- Mortgage interest per year: €20,000
- Imputed rental value (600,000 x 0.35%): €2,100
Step 1: Gross income
€100,000
Step 2: Addition of imputed rental value
€100,000 + €2,100 = €102,100
Step 3: Mortgage interest deduction
€102,100 – €20,000 = €82,100 taxable income
You ultimately pay income tax on this final amount. Because mortgage interest is deducted from gross income, your taxable income is lower. Without the mortgage interest deduction, the taxable income would have been €100,000 in this example.
In summary, the mortgage interest lowers your taxable income, and the imputed rental value increases your taxable income. The net balance of these two factors determines the tax benefit of owning a home.
Note: For homes with a property (WOZ) value above € 1,350,000, the imputed rental value is 0.35% * € 1,350,000 + 2.35% * the WOZ value above € 1,350,000.
Salaried employment vs. income tax entrepreneur
If you are in salaried employment, “too much” tax is generally withheld from your salary through your payslip. You can request a refund of the overpaid tax on a monthly basis via a provisional assessment or all at once via your annual income tax return.
An “income tax entrepreneur” (IB ondernemer) often pays no tax during the year, but pays it all at once after filing the income tax return. If they have a deductible mortgage interest, the income-tax entrepreneur usually pays less income tax at the end of the year. As a result, an income-tax entrepreneur needs to set aside less money for income tax throughout the year. You could view this as similar to the provisional refund a salaried employee receives.
It is not beneficial for an income tax entrepreneur to request a monthly tax refund, as they would simply have to pay it back when filing their income tax return.
Maximum duration of 30 years and borrowing extra
The mortgage interest deduction applies for a maximum of 30 years per loan part. This timeframe starts when you first apply the interest deduction to that specific portion of the loan.
If you take out an additional loan for a remodel or to purchase a new home, a new 30-year term begins for that specific loan part, assuming the money is used for the primary residence and the repayment requirements are met.
Example scenario
Starting points:
- Purchase of a home in January 2015 with home acquisition debt: €500,000
- Mortgage increase in 2020 for renovation: €50,000
- Purchase of a new home in 2025: Remaining debt from January 2015 is €400,000; remaining debt from 2020 is €45,000. An additional loan to purchase the new home is €200,000.
Explanation:
- The loan part from January 2015 (€500,000) is deductible for 30 years, expiring in January 2045. Upon selling in 2025, the original right continues to apply to the unpaid portion (€400,000).
- The loan part from 2020 (€50,000) for the renovation gets its own 30-year deduction term, expiring in 2050. After the sale, the unpaid portion (€45,000) remains deductible.
- The additional borrowed amount for purchasing the new home (€200,000) triggers a new 30-year term, allowing interest deduction on this amount until 2055.
This shows that every loan or increase has its own deduction period. When buying a new home, the remaining rights of older loan parts continue, while new loan parts become deductible anew.
The home equity scheme
The home equity scheme (bijleenregeling) prevents “fiscal” home equity from being tax-free converted into a higher mortgage with an interest deduction.
When you sell a home with equity and purchase a new one within three years, you “must” use that fiscal equity for the purchase of the new home. If you fail to do so, the interest on the part of the mortgage that equals the fiscal equity will not be tax-deductible.
Example calculation
Starting points:
- Sales price of the old home: €705,000
- Sales costs: €10,000
- Outstanding home acquisition debt: €445,000
Step 1: Calculate home equity
Sales proceeds – sales costs – outstanding debt = €705,000 – €10,000 – €445,000 = €250,000 “fiscal” home equity.
Step 2: Apply the home equity scheme
The fiscal home equity of €250,000 must be used to purchase the new home to retain full interest deductibility. Suppose the new home costs €800,000 and you want to take out a mortgage of €450,000:
- Own funds brought in = €250,000 (fiscal home equity)
- Total loan for purchase = €550,000
Step 3: Fiscal consequences
The interest on the €550,000 loan is fully deductible because the fiscal home equity (€250,000) was used correctly. If the buyer does not use (part of) the fiscal home equity and borrows €800,000 instead of €550,000, the interest on the extra €250,000 is not deductible.
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Old law versus new law
A distinction is made between old and new mortgage rules:
Old law (before January 1, 2013)
- Mortgages taken out before 2013 retain the right to the interest deduction.
- There is no mandatory repayment requirement (for example, interest-only mortgages are permitted).
- The 30-year maximum term still applies.
New law (from January 1, 2013)
- Interest deduction is only allowed with annuity or linear repayment schedules.
- Stricter conditions apply when refinancing or increasing the mortgage.
- When purchasing a new home and taking out a new mortgage, the old law often remains applicable to the portion of the debt that already fell under it.
Example: If your current mortgage debt is €500,000 in 2025, of which €300,000 falls under the old 2013 tax law and €200,000 falls under the new tax law: when you purchase a new home, €300,000 will again fall under the old tax law, and everything above €300,000 will fall under the new tax law.
Therefore, when making adjustments to your mortgage, it is crucial to carefully check which part falls under which law.
Frequently asked questions about the mortgage interest deduction
The mortgage interest deduction means that you can deduct the interest you pay on your home acquisition loan from your income in Box 1, resulting in paying less income tax.
The mortgage interest lowers your taxable income, while the imputed rental value (eigenwoningforfait) increases it. The difference between the two determines your net tax benefit.
The exact benefit depends on the amount of interest you pay, your income, and the maximum deduction rate. The higher your interest payments and income, the greater the tax benefit.
Yes, you can receive the benefit monthly via a provisional tax assessment. Alternatively, you can settle it all at once through your annual tax return.
Salaried employees often get tax refunds. An income tax entrepreneur usually pays less tax when filing their return, but rarely receives money back on a monthly basis.
A maximum of 30 years of interest deduction applies to each individual loan part, starting from the moment you first claim the deduction for that specific loan part.
Yes, a loan taken out for a remodel gets its own 30-year interest deduction term, provided it meets all fiscal conditions.
Existing loan parts retain their remaining deduction term. Any new loan parts taken out will start with a new 30-year term.
If you sell your home with equity and buy a new one within three years, you must use that equity toward the new home to maintain your full mortgage interest deduction.
Mortgages originating from before 2013 are allowed to be interest-only while still qualifying for the interest deduction. From 2013 onward, the interest deduction is only available if you repay the mortgage using an annuity or a linear schedule.