Create a repayment plan for your interest-only mortgage

If you have an interest-only mortgage, you do not have to make any repayments. However, it may be wise to repay early. Why could that be better for your financial situation and how do you have money left over to repay? Make a repayment plan for this. What do you have to take into account and what about taxes? A huge number of interest-only mortgages have been taken out in the Netherlands, much more than in other countries around us. Such a mortgage was popular because you did not have to make any repayments. You only pay interest. So you have more left at the end of the month. But at the end of the mortgage term you will also be left with a debt ! Now that it has been decided that the mortgage interest deduction will be gradually phased out and savings rates are plummeting, it is becoming increasingly beneficial to start repaying. Banks see that this is indeed happening: In November 2012, 42% more mortgage debt was repaid than in the same month the year before. If you have decided to make repayments, it is wise to think about it carefully. You then make a repayment plan: an agreement with yourself about how you will pay off your debt over the coming years. Below you will find information about:

  • Reasons to repay
  • Read and gain knowledge
  • Calculate buffer: how much money do you keep on hand?
  • Separate savings account for buffer and repayments: Moneyou savings account
  • What is the minimum repayment required each time?
  • What is the maximum repayment allowed per year?
  • From interest-only mortgage to repaid mortgage?
  • Acceptable residual debt
  • Psychological effect: amount of debt and amount to spend
  • Legacy on the horizon?
  • Create an overview of fixed costs
  • Target repayment amount per month
  • First repayments as large as possible
  • Announce repayment to the bank
  • Reporting changes in mortgage interest to the Tax Authorities: revised provisional assessment
  • Evaluate and adjust annual repayment plan
  • Use money wisely
  • Enjoy your home

Reasons to repay

The best-known reasons to pay off a mortgage faster are:

  • declining mortgage interest deduction
  • falling savings rates
  • falling house prices resulting in residual debt upon sale
  • declining confidence in the banks
  • peace of mind due to smaller residual debt
  • pensions are getting worse and smaller mortgage debt is a financial substitute

Mortgage-free! Gerhard Hormann

Read and gain knowledge

If you are still unsure whether you want to voluntarily make additional repayments on your mortgage, read more about this matter:

  • Gerhard Hormann: Mortgage-free! Pay off your house faster in 10 steps (this writer also regularly gives interesting lectures about his book and his own experiences with paying off)
  • Marieke Henselmans: Pay off your mortgage stubbornly

Or first read more about what a mortgage actually is.

Calculate buffer: how much money do you keep on hand?

Perhaps you have become very enthusiastic about repayment and you want to invest as much money as possible in it. Yet that is not a good plan. You may suddenly need money for all kinds of reasons: a washing machine breaks down, you lose your job so that you receive a lower benefit than your salary, you have a child, you become seriously and long-term ill, which reduces your income, a child dies study, and so on. You therefore maintain a buffer: an amount that you prefer to leave in your savings account in case of an emergency. All the money you save above your buffer is intended for your repayment. A sensible amount of buffer is different for everyone, depending on your living situation. For example, you can calculate your buffer with the Nibud Buffer Calculator. But don’t be blinded by an automatic calculation. Keep thinking for yourself: is the specified buffer suitable for me? Shouldn’t it be less or more?

Separate savings account for buffer and repayments: Moneyou savings account

You have determined your buffer: you now know how much money you want to keep aside to cover expected and unexpected costs. You can of course put the buffer and repayment amounts together in one account. Then you have to think every time: what was my buffer again? If you put your buffer in a separate savings account , you can never make a mistake. In fact, you are much less likely to come up against that buffer for non-buffer expenses. After all, you don’t often access that account. A bank like Moneyou makes it very easy for you in this sense with its savings account. Once you have opened it, you can easily create up to four additional savings accounts from that account. One for your buffer, and one for saving for your repayment. Clearly put together, yet separate.

What is the minimum repayment required each time?

With almost all interest-only mortgages you can make interim repayments. But there is a minimum amount for this. It costs a mortgage provider too much time and therefore too much money to process every 100 euros that you want to repay in the administration. That is why a minimum repayment amount is set each time. You can find this amount in the conditions of your mortgage. Or consult the bank’s website or contact them. At most banks the minimum repayment amount is 1,000 euros , some use 2,000 euros. Some banks are also flexible with the amount and accept a smaller amount, but do not officially report this. It is therefore best to call, as it is sometimes possible to arrange something by telephone.

What is the maximum repayment allowed per year?

The bank also sets a maximum repayment per year. You are usually allowed to exceed this amount, but you will have to pay a fine . So also check what the maximum is. This is usually 10% of the original mortgage amount per year. For example, if you have a mortgage of 250,000 euros, the amount you can repay annually is usually 25,000 euros.

From interest-only mortgage to repaid mortgage?

Most people intuitively want to have as little debt as possible. Your repayment plan could therefore be that you pay off your mortgage in full within the remaining term. Most mortgages have a term of 30 years (which is slightly different from the fixed interest period). After 30 years of mortgage, your right to mortgage interest deduction expires and you will therefore not receive any money back from the government. An initial calculation could be: mortgage debt divided by the remaining term divided by 12. This way you calculate what you would have to repay per month to no longer have any debt at the end of the term. Example:

  • mortgage debt: 250,000 euros
  • remaining term: 20 years
  • repayment to completely debt-free: 250,000 / 20 /12 = more than 1,041 euros per month

Acceptable residual debt

A nice goal, but not feasible for most people. And that’s not necessarily the case. It is not bad to have a small residual debt. After all: people with a rental home also pay rent for the rest of their lives . It is nice that the debt is relatively small. We therefore state that we find a residual debt of 50,000 euros acceptable. After the 20-year term, this will cost us approximately 208 euros per month at an interest rate of, for example, 5%. An excellent ‘rental’ price! Also remember that in 20 years’ time inflation will have ensured that 208 euros will be worth less than it is now, so in principle there will be less pressure on your income.

  • mortgage debt: 250,000 euros
  • remaining term: 20 years
  • repayment to 50,000 euros residual debt: 20,000 / 20 /12 = more than 833 euros per month

Psychological effect: amount of debt and amount to spend

The amount mentioned above is a significant expense per month. An amount that is shocking to many people and not feasible. Yet it is good to gain an awareness of the actual debt you have because you once bought a house on an interest-only basis. An interesting detail is that many people thought and sometimes still think that an interest-only mortgage means that you have no debt and will never have to repay it . Nothing is less true! We know better now. Repayment deferred would have been a better term. A realization does a lot to a person psychologically. This realization makes you look at your life pattern differently. Do I often buy new clothes, and do I really need them? Can I combine or adjust clothing differently? Can I trade with friends? Do I often throw away food that I could also freeze for another meal? Can I take the bike instead of always jumping into that car in front of the door? Automatic saving also has a hugely underestimated effect. Set up an automatic savings transfer a few days after the date you receive your salary in your account. This way, you will have your full salary in your account for as few days as possible. If you keep an eye on your account, you will know exactly what is in it and when. If the savings amount has already been depleted, you use the amount left in your account. This works much better than thinking ‘I’ll see what’s left at the end of the month and then transfer it to my savings account’. Something that often doesn’t happen, because in your mind you have already spent it on something else. So do that automatic savings transfer! Get used to transferring the remaining amount to your savings account at the end of the month.

Legacy on the horizon?

Many people with a mortgage have parents who are still alive. If your parents have handled their money wisely, they may have built up assets in the form of money in the bank, on a savings account or deposit, and in their own home. Our previous generations were raised with the idea that you should pay off a debt as quickly as possible. If your parents die, you may receive an inheritance. However, don’t count yourself rich, because there are various factors that reduce the inheritance: brothers and sisters with whom you have to divide the inheritance, deviating wills, unknown debts of your parents, and not to forget the inheritance tax (for percentages and exemptions: see the link under Resources).

Create an overview of fixed costs

To determine what you want to repay per year and per month, we will do further calculations. You need insight into your income and expenses. Many people think they spend about the same amount every month. Nothing is less true. Spend a few hours making an inventory of your fixed costs. Then you can see which months are expensive and which are not. This allows you to see how much money you could save each month, and in which months you will have more left over. Now you know better why you sometimes have the feeling that money is flying out of your wallet, and it can be reassuring to see that, for example, you have to pay a number of contributions in January, which will leave a hole in your budget. It gives you peace of mind to know why this happens.

Target repayment amount per month

You now know what amount you would like to save per month to repay. You also know which months are more expensive, so you can now make a plan in which months you can set aside relatively less money, and which months you therefore have to reserve a little more. Well-known expensive months are:

  • January: contributions
  • April / May / June: discuss and pay for holidays (extra costs on holiday are compensated by holiday pay)
  • December: Sinterklaas gifts, Christmas gifts, Christmas dinners, winter sports and contributions

First repayments as large as possible

It is wise to make the first repayment as large as possible. Why? Because with a large repayment you immediately see an effect on the new interest amount that you pay monthly. The first repayment also has a psychological impact: the letter from the bank with the lower interest amount makes you realize that you do have influence on the amount of your mortgage! This in turn encourages you to commit to consuming less money and putting more aside for repayment. Also remember that an amount repaid once means a lower interest payment for each month of the remaining term . Calculate what that does over the remaining term: for example, pay 30 euros less per month x 12 months x 20 years remaining term = 7,200 euros less you spend! And you can put the 30 euros per month aside for your repayment. Effect upon effect! Strictly speaking, the amount you spend less on your repayment is slightly lower, because:

  • your mortgage interest deduction will be slightly lower
  • you miss out on the savings interest that you would otherwise earn

Because for many people the savings interest rate is lower than the mortgage interest rate, repayment does offer an advantage.

Announce repayment to the bank

Many banks first require notification that you want to repay a certain amount. A form is often available for this. Check with your bank what the rules of conduct are for extra repayments.

Reporting changes in mortgage interest to the Tax Authorities: revised provisional assessment

By repaying your mortgage you will pay less interest to your bank. That’s nice. But that also means that your tax refund in the form of your mortgage interest deduction will be slightly lower. You must report this to the Tax Authorities yourself. If you do not do this, you will continue to receive more monthly refunds than you are entitled to until the end of the current year. This will only be settled when you file your income tax return, and you will have to repay the excess payment to the tax authorities. Not nice, so immediately after your repayment it is wise to report it to the tax authorities. This is called a Request or change provisional assessment. On the Tax Authorities website you will find a program with which you can report the new amount. Some time later, the Tax Authorities have processed your report and you will see this reflected in a slightly reduced amount of mortgage interest deduction as an addition to your account – if you have the deduction added monthly.

Evaluate and adjust annual repayment plan

At the end of the year, place your repayment plan next to your repayment(s). Have you managed to make repayments, and what is the difference between your plan and the total repayments in the past year? Don’t get discouraged by the difference, but look at your decreased mortgage debt and the total interest yield that you have had to pay less. Calculate what your debt will be if you make the repayments made again in the coming years. The law of large numbers comes into effect and this image will certainly make you feel better. You’re doing well!

Use money wisely

There are more ways to save money, money that you can use for your repayment. Being sensible will certainly earn you money. Find a good balance between being sensible and still doing fun things.

Enjoy your home

Don’t forget to enjoy what you have: the enjoyment of your home. See what you have, be aware of it. Make it a cozy home. Be proud of your repayments, every repayment provides a piece of your home that is truly yours. There are even people who take a photo of a piece of house that really became theirs after repayment. A great incentive to continue. Good luck with repayment!

read more

  • Fixed costs overview provides insight and control over your money
  • Mortgage-free! Pay off your house faster – Gerhard Hormann
  • Paying off your house until mortgage-free: lecture by Gerhard Hormann
  • What is a mortgage? Mortgages for beginners
  • Higher mortgage possible for dual-income couples