From interest-only to annuity mortgage without costs

Refinancing a mortgage can be a costly affair; a fine often has to be paid to compensate for the income that the mortgage provider misses. Houses are often expensive, so in some cases it is only possible to take out an interest-only mortgage. However, after a few years the desire may arise to make repayments, which can make refinancing an expensive and difficult option. It is also possible to make repayments independently via a handy construction

interest-only mortgage

An interest-only mortgage has a number of advantages , including low monthly payments. However, one of the major disadvantages of such a mortgage is that nothing is repaid, and the mortgage debt therefore remains outstanding once the term has expired. An interest-only mortgage also does not entitle you to mortgage interest deduction. Although everyone assumes that inflation will ensure that the price of the house will have risen to such an extent after 30 years that the mortgage debt can easily be repaid, this is not a certainty. Inflation is still an annual occurrence, but countries such as Japan have already shown that deflation is indeed a possibility. In addition, government intervention in the housing market, for example abolishing or further limiting the mortgage interest deduction, relaxing the rules regarding building land or adjusting the transfer tax , can cause house prices to rise or fall sharply. To obtain certainty and ultimately spend less money on interest payments , it is often better to opt for a mortgage that does provide for a total repayment of the mortgage debt at the end of the term. The problem now is that starter homes , despite the hopeful name, are often not affordable for starters. Although many newcomers to the housing market first enter the rental market before looking at purchasing a home, there are also those who do not see the disadvantages of renting as outweighing the advantages. For a starter, obtaining a suitable mortgage amount often means a long, grueling search, which, due to all kinds of regulations, ultimately leads to one of the least suitable types: the interest-only mortgage. However, after a few years, the starter will automatically find themselves in an improved financial position, and it is worthwhile to look at the form of the mortgage.

Pay off mortgage debt

The problem with refinancing a mortgage, however, is that a penalty often has to be paid to the mortgage provider for the income it has missed. In addition, changing the type of mortgage can entail a significant increase in monthly costs, which, although expected, may still cause financial problems, as the expenditure pattern must be adjusted. However, there are also options for repaying an interest-only mortgage without changing the mortgage type . However, these are based on strong self-discipline, but the result is that this form is the most flexible mortgage available. If, due to unexpected additional costs for the house or car, there is insufficient money left for the entire mortgage sum including repayment, this can be adjusted without difficulty by paying only interest for a month. Please note; It is important to carefully compare the refinancing penalty with the benefits that refinancing the mortgage entails, such as the mortgage interest deduction.

From interest-only to flexible annuity mortgage

It is possible to form your own annuity mortgage based on the interest-only mortgage. An annuity mortgage is a form in which an amount is paid every month, which is 1 part repayment and 1 part interest. Over the term, the mortgage amount becomes smaller due to the monthly repayment, causing the interest amount per month to decrease. Because this reduces the monthly costs , more can be repaid, so that the monthly costs remain the same. The advantage of this is that there are equal monthly payments throughout the entire term and the entire loan is repaid after 30 years. However, the division between interest and repayment does change during the term, and in the end this will almost only be repayment. With an interest-only mortgage, it is now possible to repay a maximum of about 10% of the initial sum each year, without a penalty . However, this often has to be done with a minimum repayment of 250 or 500 euros each time, to avoid unnecessary administration for the bank in case of extremely small repayments in high frequencies. It is now possible to use this data to create your own construction, whereby various computer programs, calculation models and mortgage advisors can all produce an exact repayment plan of the amounts to be paid per month. This will then result in a schedule, showing the amount to be repaid per year. By dividing this by 12, we ultimately arrive at approximately the amount per month (feel free to round this up slightly, due to interest effects). However, this amount may be just below the mortgage provider’s repayment threshold. The solution to this is obvious: create a new account number to which the repayment amount is transferred every month via an automatic payment order. From this account, the amount can then be transferred to the mortgage provider once every two months, for example. Please note that the amount of the direct debit increases every year, according to the annuity system. If this schedule is strictly followed, there will be no difficulties or additional costs when changing the mortgage type and repayments can still be made. Because the repayment is now completely in your own hands, this also creates an extremely flexible system. However, it also requires more self-discipline than a pre-imposed repayment by the mortgage provider. In addition, such a construction is only interesting if the effects of the missed mortgage interest deduction are taken into account in the model.