Until the decline in house prices started in 2008, mortgage advice was entirely focused on the lowest monthly costs. Little attention was paid to the quality of the mortgage. This is based on the idea that house prices will continue to rise. Price and quality are often closely linked. The mortgage types in which the value accrual for repayment depended on investments resulted in lower monthly costs compared to a savings mortgage. The mortgage type with the lowest monthly costs was the interest-only mortgage. In this variant, no value was built up for repayment and nothing was paid out in the event of death. The mortgage debt was only paid off when the house was sold. These types of mortgages may no longer be taken out again from 1 January 2013. From 2013, the mortgages must include a periodic repayment (at least an annuity repayment).
Pay off the interest-only mortgage on your own initiative
Partly inspired by the media attention to the extra repayments, more and more people are deciding to pay off their interest-only mortgage on their own initiative. As of the beginning of 2013, approximately 800,000 houses are underwater due to falling house prices. This means that the mortgage debt is higher than the value of the house. Given the strong increases in value in the previous twenty years, falling house prices were no longer taken into account. In a declining market, the interest-only mortgage does not appear to be the most suitable mortgage type. Below you will find some reasons for not repaying your interest-only mortgage.
Keep the mortgage to a maximum to take full advantage of the tax benefits
Lowering the mortgage by making additional repayments has the disadvantage that the tax benefit decreases. You can deduct the mortgage interest paid from your gross salary. By making additional repayments you will receive less from the tax authorities. It may be smarter to put away savings at a high interest rate instead of using it to make additional repayments.
The amount invested in the home cannot be recovered
You cannot get back the money you have invested in the house later. The money gets stuck in the stones, so to speak. You only have to make additional repayments with money that you will not need. The amount invested reduces your monthly costs, but the benefit is only minor. Over the years the benefit can be substantial, but you will hardly notice the benefit with occasional extra repayments.
Inflation reduces the impact of residual debt
If you bought a house, inflation works in your favor. Inflation does not reduce mortgage debt, but the value of money does decline. In 1990 you could still buy a house for NLG 75,000. You can no longer buy a house for that amount of money. This is partly caused by increases in value over the years, but also by the effect of inflation. By making extra repayments you bring these debts forward, meaning you have to use more expensive money to repay.
When the house is sold, the amount must be reinvested
When you sell your house with excess value, you are obliged to reinvest this excess value. This obligation only applies if you are going to buy a house again. Even after the sale of your home, the extra repayments you have made in the past remain in the house.
Missing out on tax incentives to repay
The mortgage interest deduction scheme was reformed in 2013. It is not unlikely that several changes will follow in the coming years in the mortgage interest deduction scheme, which is too expensive for the treasury. There may be a tax incentive in the future to make additional mortgage payments. By making repayments now, you may benefit less from future incentives.
- Paying off your mortgage early – the pros