The most common mortgage is the annuity mortgage (in Dutch: annuïteitenhypotheek). That is not without reason. With this mortgage you start with lower monthly payments. First-time buyers in the housing market have the option of choosing between two different types of mortgage: an annuity mortgage or a linear mortgage. A mortgage advisor is often asked which mortgage type is the best. Many movers also opt for (part of) annuity financing for their next home. After reading this article you will know exactly what an annuity mortgage is. That way you are well prepared and you know where you stand.
Annuity mortgage properties
The annuity mortgage is characterized by a number of important features. The most important is in the name of this mortgage type. An annuity is derived from the Latin word ‘annus’ which stands for the fixed amount you will pay per month during the term of the mortgage. The mortgage has the following features:
- Your gross monthly charges remain the same in total;
- The monthly repayment is increasing;
- A lot of mortgage interest deduction at the beginning of the mortgage;
- You have certainty that you have paid off the mortgage at the end of the mortgage;
- The mortgage has a fixed end date;
- The amount of mortgage interest is decreasing;
- The first years of the mortgage are better and cheaper (compared to a linear mortgage).
- During the fixed-rate period, you pay the same amount every month. The amount consists of two parts: a repayment part and an interest part.
- The disadvantage of this mortgage type is that your tax advantage becomes less and less during the term.
From the start of the mortgage, you do not start to pay off the loan so strongly. You will immediately pay a lot of interest. The ratio of the total amount to be paid changes every month. At the end you pay little interest and a lot of repayment. Because the interest amount on the income tax return is tax deductible, this provides more advantage to mortgage interest deduction compared to a linear mortgage. Later on, this will be the other way around: you will then pay only a little mortgage interest and you will then pay off much more. Depending on your lifestyle, this mortgage type can fit in well.
Almost everyone opts for a mortgage with a term of 30 years. At the end of this period, you will have paid off your mortgage in full.
Calculate annuity mortgage
Using the example below, you can see how to calculate an annuity mortgage. In the overview you can read that you pay the same amount each month in repayment and that the mortgage interest rate decreases. At the start of the term of your mortgage, you almost only pay an amount in interest. During the loan you pay less and less interest and more and more in repayments.
Calculation example annuity mortgage
Suppose: You want to buy a new home and a financing of 216,000 euros is required for this. The term of the mortgage is 30 years and the mortgage interest is 2%. In the calculation example below, the monthly mortgage is a fixed amount. The annuity is 798 euros per month. These gross monthly charges consist of part repayment and part interest. In the first month you pay 360, – interest. That is 2% mortgage interest on the total mortgage amount of 216,000 euros. The total interest is 4,320.- interest. You can then divide this by the number of months out of 12. As you can see below, the gross monthly charges remain the same every month. The composition of the monthly payment changes during the mortgage. The amount of repayment increases and the interest decreases every month.
Annuity mortgage is cheaper during the early years
During the first years of the mortgage, the loan is a lot cheaper than the rest of the term. As a result, the monthly payments are cheaper in the beginning than in the second half of this mortgage. The costs will then increase.
Because of the tax advantage, not only gross, but also net in the early years are better off with an annuity mortgage. This has to do with the interest that is deductible from your taxable income. The tax advantage is becoming less and less, since much less interest will be paid later on.
It is usually said that a linear mortgage is much cheaper than an annuity mortgage. However, it is difficult to assess this, because it is important to know what the person does with the amount that has been saved due to the lower monthly payments at the start of the mortgage. Will the amount be spent or will the amount make a nice return on capital growth? Over the term, straight-line repayments may be cheaper and have lower total costs. However, when you invest the amount in something that increases value, for example an investment in knowledge or a good investment? Paying off using an annuity mortgage may make more financial sense.
Repaying more with an annuity mortgage is no problem
If you make extra interim repayments, you may have to pay penalty interest. However, all providers have in their mortgage conditions and mortgage deed that you can make additional annual repayments free of charge. That will be at least 10% of the original loan amount. This means that penalty-free repayments always immediately result in lower monthly payments. You can decide for yourself how much extra you want to repay. Less money in your savings account and using this to pay off your mortgage can have a nice advantage of lower monthly payments. It is advisable to always consult with your advisor to what extent additional repayments are of interest to you. When you make extra repayments, it is possible to follow a linear schedule. That way you maintain flexibility and control. In addition, it is possible to repay faster if desired. Otherwise this is not possible. A linear mortgage can never follow an annuity repayment schedule. Be well informed whether extra repayments are a wise choice for you. A mortgage advisor from Bliss would be happy to tell you more about it.
Is an annuity mortgage best for you?
Because you have to pay less in net mortgage at the start of the mortgage, this type of mortgage is very popular with first-time buyers on the housing market. After all, in the beginning of your life you have more hobbies and a different lifestyle than later. Moreover, the salary development also determines the choice. The higher net costs are easier to determine later during the term of the mortgage once the income has increased in the meantime. It is important to take this into account when choosing a mortgage type. If you take the gross monthly costs as a starting point, not net, you are always in the right place. After all, the gross costs per month remain the same.
Bliss is happy to help you with the right choice
Would you like to know whether an annuity mortgage suits your wishes and preferences? Whether the annuity mortgage suits your personal situation, risk appetite and future depends on various factors. A Bliss advisor will be happy to help you map out your situation and options, so that you can make the most suitable choice together. Make an appointment without obligation and we will be happy to assist you.