Early mortgage repayment: the pros and cons

Many people think they are better off if they pay off a loan or mortgage early. The truth is often very different. There are advantages to taking on debts earlier, but often many more disadvantages. The advantages and disadvantages of paying off your mortgage early. And information about the penalty for early repayment of a mortgage.

Quite a bit of savings in the account, but also a mortgage: want to pay it off earlier?

Someone with a nice savings account, but also a significant mortgage debt, may consider transferring the money saved to the mortgage in order to have less debt. This indeed has its advantages, but it also has its drawbacks.

Advantages of paying off the mortgage early:

  1. Declining monthly costs
  2. Have to pay less interest
  3. There is less money in the savings account and that is also beneficial in certain cases. Less tax will then have to be paid on the savings. However, the capital gains tax (box 3) only applies to assets above 20,661 euros. Those who have less assets can cross this point off the list of advantages.

Disadvantages of paying off your mortgage early:

There are quite a few disadvantages to paying off your mortgage early. In some forms these disadvantages are even greater than in others.

Penalty for early mortgage repayment

The bank or institution that provides the mortgage receives less interest if customers repay it earlier. That is why only 5 or 10 percent of the mortgage sum may be repaid annually. Those who want to pay more often receive a fine because the bank has much less interest income. The difference between the agreed interest rate and the interest on the day on which repayment is made is taken into account. If the daily interest rate is lower, a fine is levied more often. If the daily interest rate is the same or higher, no penalty is often imposed.

Additional interest penalty for savings policy in case of early mortgage repayment

Home owners who have a mortgage linked to a savings policy may incur an additional interest penalty. This form of mortgage is based on tax-free savings, whereby the mortgage is paid off in one go at the end of the term.

Additional tax on early repayment of mortgage with savings policy

The tax authorities have decided that only tax-efficient savings may be made to repay the mortgage debt. By repaying in the meantime, too much is saved and the tax authorities will fine this with an additional tax for the excess of the saved part.

Additional loan scheme expires in case of early mortgage repayment

People who repay early increase the equity in the home (This is the difference between the sales proceeds and the remaining debt. The additional loan scheme prescribes that the equity must be reinvested in the new home. If this does not happen, the part of the loan will be forfeited. the surplus value that is freely spent the tax interest deduction. Hopefully the higher the interim repayment is, the higher the surplus value that must be invested in the new house.

De Wet Hillen

There is still a way out for people who want to pay off the last part of their mortgage more quickly. Based on the Hillen Act, a homeowner can repay faster, but pays no or less income tax on the housing value. The condition is that the mortgage has been almost fully repaid. The interest deduction may not be higher than the notional rental value. This is the tax addition for homeowners.