Bank savings, linear or annuity mortgage: the best choice!

Multiple mortgage types provide different benefits. However, the question is which mortgage type actually has the greatest advantages, especially after the implementation of the mortgage interest deduction reform. If you want to arrange a mortgage to purchase a home, which one offers the best results numerically? How can you calculate the difference and what mortgage choice should you make based on that?

Choice of mortgage

  • Reason for changes
  • An example gives wisdom
  • Linear mortgage
  • Annuity mortgage
  • Bank savings mortgage
  • Choice of mortgage

Reason for changes

In the past, the mortgage interest deduction was implemented to stimulate actual capital and capital growth among ordinary citizens. This has proven to be a great success over the years. The policy has remained unchanged over the years, meaning that many have been able to benefit from the scheme for many years. After several financial crises, the situation has become unaffordable for the government, making reforms necessary. This has led to a change in the rules regarding mortgage interest deduction. The interest deduction is only granted if repayments are made linearly or annuity during the term. In addition, there is also the bank savings mortgage where home buyers also have a tax advantage because gross savings are made. Which mortgage type is the net most favorable within this consideration?

An example gives wisdom

In order to gain insight into the consequences of the different mortgage types, it is important to compare them. Imagine that Jan Steenbakker wants to buy a house with his girlfriend. The costs are shared and Jan will bear the mortgage costs. He pays 42% in tax within scale two and three with a gross income of 3,500 euros per month. He wants to purchase a home with a market value of 150,000 euros, for which he will take out a mortgage loan of 159,000 euros. Which mortgage type is the cheapest for Jan over the complete term of 30 years, for which he has to pay 4.55% in interest?

Linear mortgage

With a linear mortgage, the same part is repaid every month, so that there is no debt left after the term. Please note that the monthly interest is 0.3715% [1.0455^(1/12)-1]. This results in:

  • a repayment of 159,000 / (12*30) = 441.67 euros per month;
  • first month interest = 0.003715 * 159,000 = 590.69 euros;
  • last monthly interest = 0.003715 * 441.67 = 1.64 euros;
  • total interest charges = 360 / 2 * (590.69 +1.64) = 106,619.40 euros.

In 30 years, with an unchanged salary, Jan would:

  • ordinary tax: 30*12*3500*0.42 = 529,200 euros;
  • correction tax: (30*12*3500-106,619.40)*0.42 = 484,420 euros;
  • tax benefit: 529,200-484,420 = 44,780 euros.

Based on the foregoing, the net costs over thirty years amount to 159,000+106,619.40-44,780 = 220,839.40 euros or 138.9% of the mortgage debt.

Annuity mortgage

With an annuity mortgage, you pay the same amount every month, but the share of repayment versus interest costs changes per month. This results in the following summary:

  • costs per month= 159,000 * 0.003715 / ( 1 – 1.003715^(-12*30)) = 801.65 euros per month;
  • total costs = 801.65 * (12*30) = 288,594 euros;
  • total interest costs = 288,594 – 159,000 = 129,594 euros.

You also receive a tax benefit on this:

  • correction tax= (30*12*3500-129,594)*0.42 = 474,770 euros;
  • tax benefit = 529,200-474,770 = 54,430 euros.

This means that the net costs over thirty years amount to 288,594-54,430 = 234,164 euros, or 147.3% of the mortgage debt.

Bank savings mortgage

In contrast to the two previous mortgage types, the bank savings mortgage does not benefit from the mortgage interest deduction, but the monthly contribution is exempt from tax. In other words, you immediately save on taxes on the contribution and it can therefore also be an interesting way to finance the home. Please note that the interest payment for a 30-year fixed term may be higher. Proportionally, this is 5.7% or 0.463% per month. This brings us to the following:

  • interest charges per month = 159,000 * 0.003715 = 590.69 euros;
  • total interest costs = 590.69 * 360 = 212,648.40 euros.

In addition, an amount is deposited each month to arrive at the final amount. In other words:

  • 159,000 * (0.00463/1.00463) / (1.00463^360-1) = 171.41 euros;
  • net costs = 171.41 * (1-0.42) = 99.42 euros;
  • total net costs = 99.42 * 360 = 35,790.41 euros.

The total net costs for financing the home via the bank savings mortgage over thirty years is 212,648.40 + 35,790.41 = 248,438.81 euros or 156.6% of the mortgage debt. Please note that before the reform of the interest deduction, bank savings in this case still had a tax benefit of 212,648.40*0.42 = 89,312.33 euros, but that benefit no longer applies after the reform.

Choice of mortgage

, bank savings remain the most favorable way to finance the mortgage. However, due to the reform of the mortgage interest deduction, the complete repayment during the term is rewarded. And that also pays off since the previous calculation example shows that Jan has 139% to 147% of the mortgage debt in expenses during the term. However, for the bank savings mortgage this is 156%. In this case, Jan will make a choice between the linear or annuity mortgage. If Jan can bear the initial costs of the decreasing linear mortgage, it is always recommended to repay linearly instead of annuity. This allows additional cost savings. If this is not possible, the annuity mortgage is a logical second option.

read more

  • What are the advantages of the linear mortgage?
  • How do you calculate the annuity mortgage?
  • How long should I fix the mortgage interest rate?
  • How far underwater is your mortgage?
  • How the bank savings mortgage works