Are you looking for an interest-only mortgage? (In Dutch: aflossingsvrije hypotheek) This type of mortgage is still rarely taken out. Most people opt for a linear mortgage or an annuity mortgage. It is still possible to take out an interest-only mortgage. In this article you can read all the features, advantages and disadvantages of the interest-only mortgage. You will also find more information about the so-called transitional law.
Properties interest-only mortgage
An interest-only mortgage is a loan with your house as collateral. This mortgage type has the following properties:
- You only pay mortgage interest during the term of the loan.
- The loan is repaid at the end of the term
- Your monthly payments are low, as you do not pay monthly repayments
If you have an interest-only mortgage, it is not mandatory to repay an amount every month. The name of this mortgage says exactly how it is. Does the term of the mortgage contract usually end after 30 years? Only at that moment does the mortgage provider expect payment of the full loan. It may also be the case that it is agreed to extend the mortgage for a certain period. During the term, you are expected to pay interest every month. It is also possible to pay off part of the mortgage in the meantime. Every year it is allowed to repay a certain part without having to pay a fine. This percentage for the penalty-free repayment is often about 10%. In the fine print of the lender, this can even be 100%. The mortgage can be paid off completely without penalty. It is often agreed that the repayment must be made from own resources. This is to prevent the mortgage from being closed without penalty.
Disadvantages of the interest-only mortgage
At first glance, the interest-only mortgage seems very attractive. After all, you only pay mortgage interest. You are not obliged to pay off the mortgage every month during the contract period. This allows you to spend your money on fun things. You have the freedom and flexibility to dispose of the money yourself. At the end of the mortgage, the intention is to pay off the mortgage in one go. That is possible in different ways. By putting a lot of money aside. With sufficient savings you can pay off the mortgage. Selling the house is also an option. Another option is to make new agreements with the lender. When the mortgage is extended, the repayment is actually postponed for a period of time.
A major risk of this type of mortgage has to do with the chance of a residual debt. You will have to deal with a residual debt when the house is under water. The value of the house as soon as you sell the house and any proceeds from forced sale is less than the current mortgage. If you don’t have enough money on hand, there is a big problem, because you cannot fill the gap that has arisen.
You can reduce the chance of a residual debt by proactively making repayments on the mortgage yourself. For example, you can imitate another type of mortgage such as the annuity or linear mortgage by paying additional repayments yourself. The options for making penalty-free repayments differ per mortgage provider. Therefore, pay close attention before making extra repayments and be advised by an independent mortgage advisor. That way you know for sure whether extra repayments are an attractive solution for you.
Transitional law and mortgage interest deduction
With effect from 1 January 2013, new rules regarding mortgage interest deduction came into effect. From this date it is mandatory to pay off your mortgage every month in order to retain the right to mortgage interest deduction. Because the interest-only mortgage is no longer fiscally attractive, it is often not interesting since this date to take out a new interest-only mortgage. Because of the transitional law, people who took out a mortgage before 2013 can often apply for a part interest-free when buying their next house. Whether this is also a wise thing to do will become apparent from good mortgage advice.
However, the use of the transitional law is subject to certain rules. Most mortgage providers, including a mortgage with NHG, allow you to take out an interest-only mortgage for a maximum of 50% of the value of the home. You can apply for a mortgage for the other half, so you are obliged to repay. It is also important that the mortgage fits within the current lending standards. The so-called ‘loan to value‘ (LTV) is also taken into account. Nowadays you can borrow less than before. When you have sold your home, it is possible to continue the interest-only part. You retain the right to mortgage interest deduction. Pay attention because the right expires after the current and the following calendar year. After this period the right expires.
Government is in favor of paying off
The government would like consumers to have a lower mortgage debt. Moreover, the risks of interest-only mortgages are considerable. The sector has put on the glove to move consumers towards paying off their mortgage. To prevent people from being surprised at the end of the term, the sector has launched a national campaign to encourage repayments. In 2018, the Dutch Banking Association (NVB) launched the term Repayment Happy (In Dutch: ‘Aflossingsblij’).
Repaying your mortgage: get good advice
Do you have an interest-only mortgage? Contact an independent mortgage advisor and find out about the possible alternatives to your existing mortgage. It turns out that paying off your mortgage is not always an attractive thing to do. Other options are also available: you can, for example, have your mortgage type converted. This can be for the entire debt or just a part of it. Moreover, it is possible to pay extra attention to building up capital, with which you wish to pay off the mortgage at a later time.
Would you like to know more about what is the best solution for you? Then make an appointment with a Bliss advisor. This is without obligation and free of charge. Moreover, you do not have to take time off, because the appointment may be outside office hours. We are happy to serve you!
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