From January 1, 2013, the obligation to make periodic repayments applies to newly concluded mortgages. Postponing the repayment to the end date of the mortgage is no longer permitted. The annuity mortgage has a number of major disadvantages compared to other types of mortgages. Until 2013, you were free to choose the mortgage type that suits you best. This has changed due to the restriction on mortgage interest deduction introduced in 2013. If you still wish to benefit from this scheme, the mortgage must meet the new requirements that apply from 2013. The mortgage type must include an annuity repayment. The most common types of mortgages in the past are aimed at repayment by the end date in order to maximize the tax benefit.
What is an annuity mortgage?
With this type of mortgage, you must pay a fixed amount per month, as long as the mortgage interest rate does not change. Because the monthly mortgage type includes a repayment, the amount you have to pay in mortgage interest decreases. Because a constant amount is collected every month, the amount of mortgage interest to be paid becomes increasingly lower and more and more is paid off. The gross costs remain the same throughout the term, but because the interest share becomes increasingly smaller, the tax benefit also decreases. The net costs increase during the term.
What are the advantages of the annuity mortgage?
The reason why this type of mortgage, in addition to the linear mortgage, has been made mandatory again from 2013 is that payments will be made during the term. The advantage for homeowners is that the mortgage debt will be paid off gradually. The monthly repayment makes you more resistant to falls in house prices. Another advantage is that the monthly costs start relatively low.
What are the disadvantages of the annuity mortgage?
Compared to the types of mortgages that were commonly taken out until 2013, the annuity mortgage also has major disadvantages. The annuity mortgage is more expensive than certain other types of mortgage. It is no longer permitted to build up assets that will fully pay off the mortgage in thirty years. Another disadvantage is that the repayment is initially very slow. The amount of monthly repayment increases very gradually. The biggest disadvantage is the limitation of the tax benefit. The repayment is no longer postponed to the end date, so the tax benefit decreases over the years. The net mortgage is going to become increasingly expensive.
Alternative to the annuity mortgage – the linear mortgage
Postponing the repayment to the end date is no longer permitted. There are two standard mortgage types that meet this requirement, namely the annuity mortgage and the linear mortgage. The linear mortgage will probably not be chosen often due to the very high costs at the start of the mortgage. In this mortgage type, the repayment is divided equally over the years in which the repayment will take place (maximum 30 years). Assuming a mortgage of 210,000 and a term of 30 years, annual payments must be made: 7,000 (583.33 per month). Suppose the mortgage interest rate is 5%. In addition to the repayment, mortgage interest must be paid in the first month: 875. The monthly costs in the first month are therefore 1,458.33. In the second month the costs decrease, because the first repayment has been made. The gross monthly amount will drop to: 1,455.90. Over the years, monthly costs continue to decrease.