Understanding mortgage types in the Netherlands: A Guide for Homebuyers.
Michaelangelo Aboyade-Cole
With falling interest rates and a shrinking housing market in the Netherlands, it is crucial for potential homebuyers to understand the various types of mortgages available to finance their new homes. The type of mortgage you choose will determine your monthly interest payments, whether your payment remains fixed, and your eligibility for tax rebates.
Types of Mortgages
Linear Mortgage (Lineaire Hypotheek)
A linear mortgage features a consistent payment structure with predictable costs. You make fixed monthly payments that combine interest on the remaining loan balance and principal repayment. Initially, the costs are higher due to a larger interest portion, but overall monthly expenses steadily decrease as the loan principal shrinks. Note that the tax benefit associated with mortgage interest payments will also gradually diminish as the interest portion decreases.
Annuity Mortgage (Annuïteitenhypotheek)
This type of mortgage offers a fixed monthly payment throughout the initial interest rate period, combining interest on the outstanding loan balance and principal repayment. While the gross amount remains constant, the net expense (payment after tax deductions) increases over time. This is because the interest portion of the payment, which qualifies for tax deduction, gradually shrinks as the loan principal is repaid, reducing the tax benefit over time.
Savings Mortgage (Spaarhypotheek)
A savings mortgage links a bank savings account to your long-term repayment plan. You make monthly deposits into this account, with the interest rate matching your mortgage interest. This effectively means you prepay your loan while also paying monthly interest on the outstanding balance. Note that this option is only available to those who obtained a Savings-Based Mortgage before January 1st, 2013
Interest-Only Mortgage
As the name suggests, with an interest-only mortgage, you pay only the interest on the loan monthly, and the principal is paid in full at the end of the loan period. You do not earn equity on the property during the loan term. You can choose between a fixed and a variable interest rate. A major risk is the potential inability to pay the principal at the end, which might force you to sell your home or take out a new mortgage. Since 2013, interest-only mortgages do not allow for tax deductions on the payments, making them more expensive.
Investment Mortgage (Beleggingshypotheek)
Also known as a rental mortgage in the Netherlands, this mortgage is designed for financing rental properties. Interest rates are higher due to increased risks associated with maintenance costs and potential vacancies. Down payments are usually significantly higher. Because a second home is considered an investment, these higher costs are justifiable. Rental mortgages can be structured as either straight-line or annuity, depending on the lender's terms.
Comparing Mortgages
| Mortgage Types | Payment Structure | Overall Costs | Interest Costs | Tax Benefits | Availability |
|---|---|---|---|---|---|
| Linear Mortgage | Fixed monthly payment with constant principal repayment + decreasing interest | Potentially slightly higher | Decreases over time | Consistent | Widely available |
| Annuity Mortgage | Fixed monthly payment with decreasing principal repayment + increasing interest | Potentially lower | Decreases over time | Highest initially then diminishes | Widely available |
| Savings Mortgage | Regular deposits into a linked savings account, full loan repayment at maturity | Potentially lower | Depends on the interest rates | Potentially high initially, then diminishes (no longer available for new mortgages) | Only available if you got it before 2013 |
Repayment Structure: Linear mortgages offer constant principal repayment, whilst annuity mortgages have decreasing principal repayment with increasing interest. Savings Mortgages don't involve direct principal repayment, but rather build savings to pay off the loan at maturity.
Interest rates: Linear mortgages might have slightly higher total interest costs due to the constant principal repayment in the early years. Annuity mortgages could have slightly lower overall interest costs due to the lower principal repayment initially. Savings Mortgages, if interest rates are favourable, could potentially have the lowest overall interest costs.
Tax Benefits: Linear mortgages offer a potentially consistent tax benefit due to the constant interest portion. Annuity mortgages provide the highest tax benefit initially but see it diminish over time. Savings Mortgages, if obtained before 2013, could have offered high tax benefits on both mortgage interest and savings account interest (regulations may apply).
Choosing the Right Mortgage
Your choice depends on your income projections:
Rising Income: An annuity mortgage could be beneficial due to its fixed monthly payments. As your income increases, the relative burden of the payment decreases, freeing up capital for investments. Additionally, interest payments on annuity mortgages qualify for tax deductions in the Netherlands.
Stable or Decreasing Income: A linear mortgage may be more suitable, providing a predictable payment structure with gradually reducing monthly costs. This allows you to allocate a lower percentage of your current, potentially higher income towards the mortgage, enabling investments with higher returns. The decreasing monthly payment helps maintain a sustainable mortgage-to-income ratio, promoting long-term financial stability. Interest payments on linear mortgages also benefit from tax deductions.
Conclusion
Understanding the various mortgage types available in the Netherlands is essential for making an informed decision when purchasing a home. Your choice should align with your income projections and financial goals. By selecting the right mortgage from the beginning, you can save money, which can be reinvested into other opportunities, potentially leading to higher returns in the long run. Consulting a professional mortgage adviser is crucial to selecting the optimal mortgage that fits your specific needs and long-term objectives.
