More and more people are opting for an installment mortgage. Especially young home buyers and owners take out such a loan. But what does an installment-free mortgage really mean? What is its appeal and what are its disadvantages? Radar asks Moneywise director Jeroen Wolfsen.
The number of young home buyers who applied for an installment-free mortgage loan in 2021 has increased by more than a quarter compared to 2020, the Mortgagee informs ANP. The number of interest-only mortgages applied for by homeowners under the age of 35 to refinance or improve their home has even grown by more than 115 percent. You may also be considering such a loan, but you are not sure how it works.
What is an installment mortgage?
With a ‘normal’ mortgage loan, ie an annuity loan, you pay interest every month and you repay part of the debt every month. With an installment-free mortgage, you only pay interest, Jeroen Wolfsen explains: You do not have to pay off your debt every month. (You can repay on an installment-free mortgage in the meantime. And if you want to pay off a lot at once, in some cases a penalty interest rate applies, just as with an ordinary mortgage.)
Ultimately, of course, that debt has to be paid. After about thirty years – the usual term of a mortgage loan – the bank will knock on your door to get the loan back. That means you have to pay it back with your own savings or you have to sell your house. If you do not want or can not, at that time you need to take out a new mortgage.
The difference in tax advantage between grace period and annuity
Tax handles the two types of mortgages differently. She contributes to your annuity loan through the mortgage deduction. This means that you can partially deduct the interest you pay on your mortgage each month from your income tax.
This benefit does not apply to an installment-free mortgage. Another benefit is: you can deduct it from your total assets. For example, if you have an installment-free mortgage of 100,000 euros and at the same time own 200,000 euros in savings, shares and cryptocurrencies, the tax authorities will deduct one amount from the other. So you only have a ton of power. The tax imposed on this, capital gains tax, will in such a case be lower for you.
How an installment mortgage determines your monthly payments
What can also be lower with an installment mortgage is your monthly payments. This is because you only pay interest every month, no repayment. This is probably the biggest feature of this type of loan, says Wolfsen.
‘If you have 100,000 euros in mortgage debt and you pay an interest rate of 1.5 percent, you pay 1,500 euros in interest per year,’ he calculates. ‘It’s 125 euros a month. Good to do. If you also repay the 100,000 euros in thirty years, the monthly payments quickly increase to 350 euros – almost three times as expensive. The word ‘expensive’ is obviously not quite right, because it’s just your own money you buy stones for, but your monthly benefits will be higher. ‘
Loan maximum for your house
Still, you can not just choose whether to borrow that ton – or any amount – on an annuity- or interest-free basis. There are two reasons for this.
First, you can never get a mortgage loan completely interest free. You can borrow a maximum of half of the value of the home without interest, while the other half must be a ‘normal’ mortgage loan.
And secondly: if you take out part of your mortgage interest-free, the bank will assess the loan as a whole more strictly. The bank takes into account that you get a smaller mortgage interest deduction. As a result, you can borrow less overall. ‘With an installment-free mortgage, you can therefore not get more loans to beat other buyers in a bid,’ Wolfsen explains.
Not for the offer, but the renovation
Many people find the option particularly attractive if they own a home and want to renovate it without throwing up their monthly benefits. Wolfsen describes a situation: ‘Four years ago you bought a house for 3 tons. To your delight, you see that your home is now worth 6 tons. On the 3 tonnes, you only have a loan of 2.5 tonnes, so you already have 3.5 tonnes of equity. You borrow 50,000 euros interest-free to manage the bathroom and kitchen, which only costs a few tens more per month. In the meantime, you automatically redeem the 2.5. Then you will soon have an 8 ton house – or how much it will be worth – and a 50,000 euro mortgage. “So what?” That’s the idea. ‘
National Mortgage Guarantee and an installment-free mortgage
You can not take out a new installment-free mortgage with National Mortgage Guarantee (NHG). This is prohibited by legal standards for granting a mortgage. There are people who, thanks to an old scheme, the ‘transitional right’, today have an installment-free mortgage loan with NHG, but as a starter you can not get that.
The biggest risk
There are certainly disadvantages to an installment-free mortgage that Radar was already aware of in 2018.
Wolfsen says: ‘The most important question is whether you can always continue to pay the burden of your interest-only mortgage. If the bank knocks on your door at the end of the loan period to demand or transfer the mortgage, you must have enough money to arrange it. ‘ In that phase of life, you must therefore have sufficient income, eg from a pension, or enough capital, eg from the equity in your home.
Another risk – how unlikely it now seems – is that the housing market will collapse. If your home falls in value and you have an annuity loan, you probably still have some equity that you can use to buy a new home. If you have an installment-free mortgage, you have less equity value, and it is therefore more difficult to move to a new home.