More and more people choose an interest-free mortgage loan. Especially young home buyers and owners take out such a loan. But what does an interest-free mortgage actually mean? What is its appeal and what are its drawbacks? Radar asks Moneywise director Jeroen Wolfsen.
The number of young home buyers who applied for an interest-free mortgage in 2021 has increased by more than a quarter compared to 2020, Hypothekeren reports to ANP. The number of interest-free mortgages applied for by homeowners under the age of 35 to refinance or improve their home has even grown by more than 115 percent. Perhaps you are also considering such a loan, but you are not sure how it works.
What is an interest-free mortgage?
With a ‘normal’ mortgage loan, i.e. an annuity loan, you pay interest every month and you pay off part of the debt every month. With an interest-free mortgage, you only pay interest, explains Jeroen Wolfsen: You don’t have to pay off your debt every month. (You can pay off an interest-free mortgage in the meantime. And if you want to pay off a lot at once, then in some cases a penalty interest applies, just like with a regular mortgage.)
Ultimately, of course, that debt must be paid. After about thirty years – the usual duration of a mortgage loan – the bank knocks on your door to demand the loan back. This means you have to pay it back with your own savings or you have to sell your house. If you don’t want to or can’t, you must take out a new mortgage at that time.
The difference in tax benefit between interest-free and annuity
Tax handles the two types of mortgage loans differently. She contributes to your annuity loan through the mortgage interest 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 interest-free mortgage loan. Another advantage is: you can deduct it from your total assets. For example, if you have an interest-free mortgage loan of 100,000 euros and at the same time own 200,000 euros in savings, shares and cryptocurrencies, the tax authorities subtract 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 interest-free mortgage determines your monthly payments
What can also be lower with an interest-free mortgage are your monthly payments. This is because every month you only pay interest, no repayment. That 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 is 125 euros a month. Good to do. If you also repay this 100,000 euros in thirty years, the monthly payments will soon increase to 350 euros – almost three times as expensive. Of course, the word ‘expensive’ isn’t quite right, because it’s just your own money you’re buying stone with, but your monthly payments will be higher.’
Maximum loan for your house
Still, you can’t 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 that is completely interest-free. You can borrow a maximum of half of the home’s value interest-free, 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 evaluate the loan as a whole more strictly. The bank takes into account that you get a smaller mortgage interest deduction. This results in you being able to borrow less overall. ‘With an interest-free mortgage, you cannot therefore get more loans to beat other buyers in a bid,’ explains Wolfsen.
Not for the offer, but the renovation
Many people find the option particularly attractive if they own a house and want to renovate it without throwing up their monthly payments. Wolfsen describes a situation: ‘Four years ago you bought a house for 3 tonnes. To your delight, you can 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 a house of 8 tons – or however much it will be worth – and a mortgage loan of 50,000 euros. “So what?” That’s the idea’.
National Mortgage Guarantee and an interest-free mortgage loan
You cannot take out a new interest-free mortgage loan with the National Realkreditgaranti (NHG). This is prohibited by legal standards for providing a mortgage loan. There are people who, thanks to an old scheme, the ‘transition right’, today have an interest-free mortgage with NHG, but you can’t get that as a starter.
The biggest risk
There are definitely downsides to an interest-free mortgage, which Radar was already aware of in 2018.
Wolfsen states: ‘The most important question is whether you can always keep paying the burden of your interest-free mortgage. If the bank knocks on your door at the end of the loan term to demand or transfer the mortgage, you need to have enough money to fix it.’ You must therefore have sufficient income in that phase of life, for example from a pension, or sufficient capital, for example from the equity in your home.
Another risk – however unlikely it now seems – is that the housing market will collapse. If your home is worth much less and you have an annuity loan, you probably still have some additional value that you can use to buy a new home. If you have an interest-free mortgage, you have less equity, and it is therefore more difficult to move to a new home.