The interest-only mortgage was a very popular mortgage form in the past. This has to do with the large tax benefit. Are you going to take out a new mortgage now? Then you can no longer benefit from the mortgage interest deduction if you opt for an interest-only mortgage. Below we explain what the repayment-free mortgage means, what the advantages and disadvantages are and even more what you need to know about this type of mortgage.
What is a interest-only mortgage?
The name repayment-free mortgage already reveals it, it is a form of mortgage where you do not repay during the term. You only pay interest on the mortgage sum on a monthly basis. Because you do not pay anything, the interest amount remains the same during the term. Incidentally, this only applies if you have fixed the interest during the term and have not opted for variable interest, or if your fixed-rate period expires during the term. Because you do not pay off, you do not accrue capital, you keep the same mortgage debt. With the sale of the home or with savings you have to repay the debt at the end of the term. Below we have illustrated how the monthly payments of the interest-only mortgage look like.
The interest-only mortgage carries a high risk. The risk that you can not repay the mortgage because the house yields too little and / or you have not enough capital to repay the mortgage.
The features of interest-only mortgage:
Below we have briefly listed the characteristics of an interest-only mortgage:
- No repayment is made during the term
- The monthly amount consists of interest
- Mortgages taken out before 1 January 2013 can make use of mortgage interest relief
- This form is not interesting for tax purposes for new mortgages
Credit crisis caused changes
The credit crisis, which has already started in America, will also affect the European and Dutch economy in the summer of 2008. A number of banks can not pay investors the high interest they have promised. Although the European Central Bank in Frankfurt helps, people become more fearful. Both producer and consumer confidence falls below freezing. Less money is spent and less produced. This makes it less successful with the economy in the Netherlands. The rules surrounding the provision of money are being tightened and borrowing money has become more expensive. For a long time we have had to deal with high unemployment and lower house prices.
The interest-only mortgage was formerly a very popular mortgage. However, this form put many people in trouble during the crisis. Because they could have taken out high mortgages at home and did not settle. Thanks to the crisis, the value of their home had fallen, the bills could no longer be paid and some people had to sell their home (forced). And that at a loss. This gave them high debts.
The credit crisis caused the government to make changes to the policy. As of 1 January 2013, mortgage interest deduction can no longer be used for a new interest-only mortgage to be taken out. In order to qualify for the mortgage interest deduction, only a mortgage can be chosen whereby repayment is made during the term, ie for an annuity or linear mortgage. The rules surrounding the maximum mortgage have also been changed. In this way the government wants to prevent people from getting into trouble again in the future.
Mortgage interest repayment-free
People who have taken out a interest-only mortgage before 1 January 2013 can still benefit from the mortgage interest deduction. Do you want to increase your mortgage or take out a new mortgage? Then you have to choose between a linear or annuities mortgage. Only then can you deduct mortgage interest from the tax on the borrowed part.
Redeem interest-only mortgage
Do you want to switch your interest-only mortgage to another mortgage provider without having to relocate? You can decide to close the mortgage because the fixed-rate period ends or because you can get a more favorable interest from another mortgage provider. There are possibilities. What you have to take into account is that you make costs for the transfer. Are you doing this during your fixed-rate period? Then your mortgage provider can charge a penalty interest. During the interest rate review you can, however, have to pay without penalty interest. You also have to deal with advice and brokerage costs and valuation costs.
Dispute redemption part
Mortgage lenders often use the rule that the interest-only mortgage may not exceed 50% of the market value, even if you have a higher interest-free part with your current mortgage lender. If your home is worth less than the mortgage amount, the new mortgage lender does not always want to offer the option for switching. View together with an independent mortgage advisor what your options are.
Redeem interest-only mortgage and mortgage interest relief
Do you want to transfer your interest-only mortgage, which you took out before 1 January 2013, to another mortgage provider and keep this form of mortgage with the tax benefit? Which can.
Interest rate interest-only mortgage
Do you want to switch your mortgage because of lower interest rates? Interest rate averaging is possible with some mortgage lenders. In that case, your current mortgage interest will be on average with a lower interest rate on your new fixed interest period.
Change current mortgage form
Do you want to convert your interest-only mortgage into another form of mortgage where you will redeem and still use the mortgage interest deduction? Then you can choose between the linear or annuities mortgage.
Did you take out a different form of mortgage before January 1, 2013 and do you want to convert it into an interest-only mortgage? This is possible, while maintaining the mortgage interest deduction scheme. The mortgage lender will first check whether you can qualify for this. For this, the standards that have been adopted as of 1 August 2011 are used. First ask an independent mortgage advisor for advice .
Calculate interest-only mortgage
Do you want to calculate the benefit for you to transfer or convert the interest-only mortgage? A mortgage advisor can help you with this. For a new mortgage it is not useful to calculate what a repayment-free mortgage would cost you. After all, you can not use the mortgage interest deduction for this form.
Risk of interest-only mortgage
In addition to the large tax advantage, a repayment-free mortgage also entails risks. Because you do not pay at all during the term, you run the risk that you have to sell the house at the end of the term, in order to be able to pay off the mortgage. And if the yield is too low, you are left with a residual debt.
Intermediate repayment in case of interest-only mortgage
You can decide to partially repay the interest-only mortgage in the interim, to limit the risk of getting into trouble because you can not repay the mortgage. The advantage is that your monthly expenses are reduced because your interest amount is lower. This can offer a solution if you expect to have a lower income in the future, because you will start working less, for example. Also reduce or prevent any residual debt. If you use your equity to redeem, you ensure that your assets in box 3 decrease, so that you pay less or no capital yield tax. The mortgage lender can also decide to reduce the interest surcharge, because the provider runs less risk on the loaned amount.
The extra repayment also has disadvantages. You can not redeem unlimited. You can also deduct less mortgage interest, which means you may have to pay more income tax. And if you sell the property with surplus value, then you should use this for the purchase or improvement of a new home (additional loan scheme ). Otherwise you can not make optimal use of the mortgage interest deduction.
National Mortgage Guarantee
Nowadays you can not get a new mortgage with a National Mortgage Guarantee if you opt for an interest-only mortgage. Previously it was partly possible. In that case, you could finance a maximum of 50% of the home with a mortgage on a mortgage with NHG. You had to finance the other 50% with a different form of mortgage, or use savings for it.
Benefits of interest-only mortgage
The benefits were great before 1 January 2013 to take out a repayment-free mortgage. A reason why this form used to be so popular in the past. The advantages are:
- If you have taken out the mortgage before 1 January 2013, you can use the mortgage interest deduction.
- During the term you only pay the mortgage interest. If you can still make use of the mortgage interest deduction scheme, you profit from this to the maximum. The interest amount is high during the term.
Disadvantages of interest-only mortgage
The mortgage form always seemed very advantageous, but there are also drawbacks to the interest-only mortgage. The past has shown that when people got into trouble because they could not pay off their mortgage debt. Below we have listed the disadvantages:
- If you want to take out a new mortgage, or you want to increase your current mortgage, you can not use the mortgage interest deduction.
- With this form of mortgage you do not build up any capital to repay the mortgage.
- Do you not have sufficient funds to repay the mortgage at the end of the term? Then you may be forced to sell the property with all its consequences.
- Do you have to sell the property prematurely, for example because of unemployment or a divorce, and this is done at a lower amount than the outstanding mortgage amount? Then you may have a residual debt.