Types of mortgages

Types of mortgages

Since 2013, mortgage interest is only tax deductible if you choose an annuity or linear mortgage. Did you have a mortgage on your home with which you were entitled to deduct interest on December 31, 2012? Then you are still entitled, under certain conditions, to deduct your mortgage interest if you have a different type of mortgage. We will explain the most common types of mortgages.

From 2013

Annuity mortgage

The amount that you pay to your lender (gross monthly costs) remains a fixed amount each month. The monthly costs consist of an interest payment on the loan and a principal payment. In the beginning, with you will pay off only a small amount of the initial capital loan, whereby you will pay more interest on your mortgage. The interest on your mortgage is tax-deductible. As time goes on, the portion of the principal payment increases and as a result, the portion of the monthly payment towards interest decreases. Therefore, your tax return will decrease, causing your net monthly costs (gross monthly costs minus tax return) to increase.

Most important characteristics of the annuity mortgage:
• Equal gross monthly costs
• Increasing net monthly costs
• Lower initial monthly costs compared to a linear mortgage
• Principal payment during the mortgage term

Linear mortgage

You have a fixed principal payment per month (in the case of a 30 year term: mortgage amount / 360 months). The monthly cost consists of principal payment plus the interest owed on the remaining mortgage. Compared to an annuity mortgage, the linear mortgage initially has higher monthly costs. The tax advantage decreases faster in the case of a linear mortgage in comparison to an annuity mortgage. This is due to the higher principal payment. The more you repay, the more both your gross and net monthly costs will decrease.

Most important characteristics of the linear mortgage:
• Gross and net monthly costs will decrease during the mortgage term
• Equal principal payment every year
• Higher monthly costs initially than in the case of an annuity principal payment
• Principal payment during the mortgage term

Prior to 2013

Prior to 2013, a mandatory principal payment was not a necessary requirement to be eligible for mortgage interest tax deduction. Therefore you could also select an interest-only mortgage, whether linked to a capital accrual product or not. The accrued capital will be used to repay the mortgage at the end of the mortgage term. Thus there is an optimal tax advantage: you can deduct your mortgage interest in full, and the accrued capital, under certain conditions, will not be subject to a box-3 levy. The most common form of this mortgage type is the guaranteed savings account mortgage (bankspaarhypotheek).

Interest-only mortgage

In the case of an interest-only mortgage, the capital is not repaid and you only pay mortgage interest. The advantage is that the monthly costs are as low as they can be. In the event that the value of the house is lower than the outstanding debt, the risk of a negative home equity is present. Normally speaking, you are unable to lend more than 50% of the value of the house with an interest-only mortgage. Your mortgage broker can inform you of the possible exceptions. Since 2013, you can only deduct mortgage interest of a new interest-only mortgage from taxes under certain conditions. In all cases, you have to be able to show that you already had a mortgage on your home prior to 2013.

Most important characteristics of the interest-only mortgage:
• No principal payments, only interest payments
• Fixed gross and net monthly costs
• Lowest possible monthly costs

Tip: An interest-only mortgage provides more flexibility than mandatory interim principal payments do. You can, at your own discretion, roughly imitate an annuity/linear mortgage with additional (penalty free) principal payments. If you can achieve a higher net yield on your capital than the net interest you pay on your mortgage, an interest-only mortgage is even more interesting. Do you lack the discipline to save? Than perhaps obligatory interim principal payments are a wiser option.

Guaranteed Savings Account Mortgage (Bankspaarhypotheek).

With a guaranteed savings account mortgage, you save on a (escrow) bank account to guarantee that you can pay off the loan at the end of the mortgage term. You accrue capital with a yield that is equal to the mortgage interest payment. If the mortgage interest increases, then the compensation on your guaranteed savings account mortgage will also increase. The interest you have to pay increases, though simultaneously the amount that you save decreases. Therefore, an important advantage of the guaranteed savings account mortgage is that it has a shock absorbing effect on the monthly costs in the event of a change in interest rate.

Do you currently have a capital product for the repayment of a mortgage on your home? Then, under certain conditions, you can transfer the accrued value to the new guaranteed savings account mortgage and continue to accrue capital. Whether continuing to do so would be a smart choice depends on your personal situation. Generally, continuation becomes increasingly interesting the more you accrue an increasing amount of capital in the current capital accrual product. Your mortgage broker can of course help you in making the right decision.

Most important characteristics of the guaranteed savings account mortgage:
• Fixed gross and net monthly costs
• Lump sum principal payment at the end of the mortgage term
• Capital accrual via a savings account
• Shock absorption effect in the event of a change in interest rate

Other types of mortgages

There are other types of mortgages which are similar to the guaranteed savings account mortgage in regards to setup. The main differences are the applicable tax regulations and whether you are saving or investing. Mortgage types can include guaranteed life insurance mortgage (spaarhypotheek), investment account mortgage (beleggingshypotheek), life insurance mortgage (levenhypotheek), or hybrid mortgage (hybridehypotheek). In practice however, they are used less frequently. As these types of mortgages are no longer offered, they will gradually disappear from the market over the coming years.