Due to falling house prices, more and more homeowners are forced to make additional repayments on their mortgage. Making additional repayments on a savings mortgage may be unwise. In the past, homeowners who made extra payments on their mortgage were considered crazy. By keeping the mortgage debt to a maximum, you can optimally benefit from the mortgage interest deduction scheme. However, circumstances have changed. The mortgage interest deduction scheme will be increasingly limited in the future. In addition, additional repayments have also become necessary for more and more homeowners. As soon as the mortgage debt is higher than the sales value of the house, it is smart to reduce the mortgage debt.
Make additional repayments on your mortgage in the meantime
When you took out the mortgage, you made agreements with the bank about how and when repayment will take place. Contrary to the agreements, you have the option to make additional repayments on your mortgage. Most banks offer their customers the option to repay a maximum of 10 to 15 percent of the principal amount additionally each year. Additional repayments are encouraged for interest-only mortgages. Additional repayments are not recommended for the savings mortgage. In this mortgage type, it is wiser to build up additional capital in the linked endowment insurance.
Why not make additional repayments on the savings mortgage?
Within the savings mortgage, a value is built up in the endowment insurance that is sufficient to pay off the mortgage at the end date. By making additional repayments in the meantime, an insurance payment will be made at the end date that is higher than the remaining mortgage debt. The excess is interesting for the tax authorities, because this is what the tax authorities are responsible for taxing. The interest component of the excess will be taxed.
Do not make extra repayments, but pay extra into the insurance
Homeowners with a savings mortgage also have the option to reduce monthly costs. By paying extra into the endowment insurance linked to the mortgage, a lower premium will be charged in the future. The premium must be reduced to prevent the payout from the policy from being higher than the mortgage debt. This is also wise from a fiscal perspective, because the premium for the endowment insurance is not tax deductible. Reducing the mortgage debt with additional repayments limits the tax benefit and paying extra into the policy actually reduces the net costs.
No additional unlimited deposits into the savings mortgage
The capital required to repay the mortgage debt at the end date is built up in a capital insurance policy for your own home. In this insurance, the accrued value is tax-free. There are requirements for this capital insurance. An exemption applies at the end date depending on the term of the endowment insurance. The insurance must have been in effect for at least 15 years to be entitled to an exemption. Once the policy has run for 20 years, an even higher exemption applies. The highest premium may not exceed ten times the lowest. Before you make additional repayments on your mortgage, it is wise to talk to your bank or mortgage advisor. In addition, you should consider that an additional amount paid into the endowment insurance policy can no longer be recovered. You should only make additional mortgage repayments and additional payments into the endowment insurance with money that you do not necessarily need to have now or in the future.