The interest-only mortgage is the mortgage type with the lowest possible monthly costs. This type of mortgage does not include capital accumulation or a method of repaying the mortgage debt. The loan therefore always exists. At the end of 2012, homeowners with an interest-only mortgage began en masse to convert their interest-only mortgage to a different and better mortgage type. It was initially possible to convert the mortgage until January 1, 2013. In December 2012 it was announced that a postponement had been granted. Homeowners were given until April 1, 2013 to convert their mortgage. As a good alternative, you can also choose to pay off the interest-only mortgage on your own.
The interest-only mortgage is not the best choice
Due to falling house prices, homeowners are realizing that an interest-only mortgage was, in retrospect, not the wisest choice. This type of mortgage does not cause problems with constantly rising house prices, but as soon as prices drop, homeowners are presented with the bill. The interest-only mortgage will only be paid off when the house is sold.
Pay off an interest-only mortgage
To pay off this type of mortgage, you must make your own plan of action. You can pay off the mortgage at your own pace. In practice, it will not be easy to make additional mortgage payments. In most mortgages, the monthly costs are already based on the maximum income. There is still some additional spending capacity, but generally insufficient to be able to make effective repayments.
Paying off an interest-only mortgage is a long-term process
Paying off the mortgage in the meantime is a process that very slowly results in lower monthly costs. Assuming a mortgage interest rate of 4%, an additional repayment of 1,000 results in a monthly saving in mortgage interest of 3.33. This is also a gross saving, because you also receive a lower amount of tax benefit because you can deduct less mortgage interest from your income.
Why make extra payments on your mortgage?
Despite the disappointing savings, making extra repayments can still be wise. This is especially true for houses that are flooded. This means that the mortgage debt is higher than the value of the house. These houses have become unsellable due to falling house prices. The owner cannot sell the house without having a residual debt. You have to save, so to speak, to be able to sell the house. By making additional repayments in the meantime, you can also avoid having high monthly costs when you are entitled to pension. After retirement, income is lower. Mortgage costs may no longer fit into the monthly budget.
It is not wise to make additional repayments for all mortgage types
Reducing the mortgage debt by making additional repayments in the meantime is not wise for all mortgage types. The savings mortgage ensures full repayment of the mortgage debt at the end date. By making additional repayments you reduce the mortgage debt, but the mortgage type is still based on the original insured amount in capital insurance. At the end date of the mortgage, an amount is paid out from the endowment insurance that is higher than the mortgage debt. The interest component of the higher payment will be taxed. Before you decide to make additional mortgage payments, it is wise to seek advice in advance from your mortgage advisor or your bank.