Annuity mortgage and linear mortgage: the differences

Since 2013, it is no longer attractive to take out a bank savings, interest-only or investment mortgage, because the mortgage interest deduction for this type of mortgage has expired. The home buyer now has the choice of an annuity or a linear mortgage. These loans mean that the home buyer starts repaying immediately. The government has chosen this so that the government has to pay less through taxes. You do not pay interest on paid off parts of your mortgage and you therefore cannot deduct it.

Linear/Annuity mortgage versus bank savings/interest-only mortgage

With an interest-only mortgage, the home buyer only paid interest. The debt was only repaid after the house was sold. The advantages were low monthly costs and optimal benefit from the mortgage interest deduction. During the economic crisis that started in 2008, many homeowners ran into problems because they were left with residual debt because the home had to be sold below the price of the mortgage. With a bank savings mortgage, buyers could also take full advantage of the mortgage interest deduction. Every month the homeowner puts a fixed amount in a savings account. The debt is only repaid at the end of the term. With the linear and annuity mortgage, repayments are made every month.

Linear mortgage

The linear mortgage is repaid a little each month, which immediately reduces the debt. You pay interest on the repayment. The costs are the highest with this mortgage, because the interest is still very high. That is becoming less and less, because you partly pay off the mortgage debt every month. This means you have an increasingly lower debt, on which you owe less interest. This means you can deduct less than someone with a bank savings mortgage or an interest-only mortgage. A linear mortgage is the simplest mortgage. For example, if you take out a mortgage of 250,000 euros over a term of thirty years, you will pay 694.44 euros monthly to pay off the debt. The interest continues to decrease every month. Initially, the monthly costs are 1,040 euros per month at an interest rate of five percent. In the last month that is only 697 euros. The big advantage of the linear mortgage is that your debt becomes less and less and you will therefore have more to spend later. That can amount to a few hundred euros less per month.

Annuity mortgage

With the annuity mortgage, the mortgage debt is also repaid monthly. This mortgage type is the reverse of the linear mortgage type and was once created to make it possible for people who do not earn much to buy a home. The costs are low in the beginning, but more has to be paid every year. Initially, the interest on this mortgage is high, which means that a lot of interest can be deducted from the tax. It is assumed that the mortgage holder will not run into problems due to higher taxes due to salary increase/career and monetary depreciation. A disadvantage of the annuity mortgage is that there is no protection against interest rate increases, which means there is a risk that you will suddenly have to pay much more. It is therefore important not to borrow the maximum with this type of mortgage (not to take out a top mortgage), but to opt for a fixed interest period for the term of the mortgage, in most cases thirty years. You repay the same amount every year on this mortgage. At the start, this is mainly interest and little repayment. If you have almost paid off your mortgage, you will pay much more in repayments. Compared to a linear mortgage, just half of the house has been paid off after 20 years. With a linear mortgage this is 67 percent.

What is the best mortgage?

With an annuity mortgage you benefit more from the interest deduction than with a linear mortgage. With this mortgage you pay more interest, which means that a linear mortgage is cheaper at the end of the day. For many people, the linear mortgage is too expensive, because the costs at the start of repayment are high. On the other hand, the costs are becoming increasingly lower. The annuity mortgage and the linear mortgage are more expensive than the old bank savings mortgage and the old interest-only mortgage, because it is no longer possible to take full advantage of the interest deduction.