The current crisis creates a lot of uncertainty. Especially among homeowners. They don’t know what is wise. Should you pay off your mortgage more quickly or not? In this article we discuss the advantages and disadvantages of accelerated mortgage repayment.
A mortgage is a loan. The loan makes it possible to raise a large amount, such as for the purchase of a house. Most Dutch people use their mortgage to finance a home. On average, a mortgage in the Netherlands is between 150,000 and 300,00. A mortgage is taken out based on someone’s salary. Someone with a lower salary will not easily obtain a high mortgage from the bank. They want to ensure that a mortgage is fully repaid.
You pay interest on a mortgage. There are therefore two cost items that form the monthly costs, namely the repayment (or putting money into a savings account, investment fund or insurance, if it is linked to the mortgage) and the interest. The interest is the part for the bank that you will not see again. Interest is necessary and for that reason people often don’t think about it. However, the interest you ultimately pay to the bank over the entire term is a lot more than the amount you have ever borrowed. The interest rate is calculated annually. If you have taken out a mortgage of 150,000 at an interest of 5% (which is quite average), you pay 7,500 in interest to the bank per year. This over a term of thirty years (which is also very common for a mortgage) means a total return of 225,000 for the bank. That’s 75,000 more than the mortgage is worth. You will not see those 225,000 again.
Pay off your mortgage faster
Particularly because of the high interest costs, many people decide to pay off their mortgage more quickly. Accelerated mortgage repayment has the great advantage that the debt to the bank decreases little by little and eventually disappears. The repayer also influences the interest costs and the final amount that he pays in interest. Paying off your mortgage accelerated has many advantages.
The advantages of accelerating your mortgage repayment:
- you reduce the total debt to the bank, so that you owe less and less to the bank;
- if you repay, the total amount decreases, and with it the interest;
- if interest costs and repayment costs decrease, you will have more and more money left over time;
- your monthly costs are going down;
- you are becoming less and less dependent on decisions made by the government regarding your mortgage.
Anyone who asks the experts will hear that there are also some disadvantages to accelerated repayment of your mortgage, namely:
- the mortgage interest is (still) tax deductible;
- If you repay too much, you will have to pay a fine.
These two disadvantages are the most frequently heard disadvantages. Anyone who looks critically can also say that the mortgage is and remains a debt. Deductible or not, you always pay more when you borrow. And it is up to you to pay the fine yourself. Most banks allow you to repay up to a percentage of 10% without penalty. If you want to repay more that year, you must meet the bank’s expected interest rate and a middle path will be sought.
Many people choose to pay off their mortgage faster. They do this because they no longer want to be dependent on government decisions, but also because this saves a lot of money in terms of interest. Paying off a mortgage faster provides many benefits, including more financial freedom.