Choosing the right mortgage
Once you manage to acquire a home you might need to apply for a mortgage. In this process you are faced with a number of important choices that have a major impact on your monthly payments. Here we will tell you all about the choices you can make and learn more about the pros, cons and consequences of all these choices.
Key takeaways
Annuity keeps the monthly payment flat and is easiest to budget; linear costs more at the start but less overall; interest-only is cheapest monthly but repays nothing.
To keep the interest deduction on a first home you must repay on an annuity or linear basis within 30 years — interest-only moves that portion from Box 1 to Box 3.
The lowest rate is not automatically the best deal — check penalty-free repayment, rate portability to a next home, offer validity, and whether life insurance is required.
When you buy a home, one of the first choices you make is the type of mortgage that fits your situation. There are three main options: annuity, linear and interest-only. Both annuity and linear mortgages let you repay the full amount within the same term, usually 30 years. The difference lies in how you make those repayments.
With an annuity mortgage, you pay a fixed monthly amount that includes both interest and repayment. In the beginning, most of what you pay goes to interest. Over time, as your debt decreases, you pay less interest and more repayment. Your total monthly payment stays the same, which makes budgeting easy.
A linear mortgage works differently. You pay a fixed amount of repayment each month, plus interest on the remaining balance. Your total monthly cost starts higher but goes down over time. Although it feels heavier at first, this option is usually cheaper over the full term.
An interest-only mortgage works in another way. You only pay interest during the loan term, so your monthly cost is low. But you still need to repay the full loan at the end, for example through savings or when you sell the house.
Mortgage interest deduction
If you buy a home that is not your first and took out your mortgage before 2013, you can still deduct the mortgage interest without having to repay the loan monthly. If you buy your first home or purchased your previous home after 2012, you only get the mortgage interest deduction if you repay the loan on an annuity or linear basis within 30 years.
Even so, many first-time buyers still choose a partially interest-only mortgage. This option lowers monthly costs but also affects your tax position.
If you want to take full advantage of the mortgage interest deduction, you usually need to repay your mortgage on an annuity or linear basis. Still, not everyone wants or needs to repay the entire mortgage within 30 years. If that applies to you, you can consider borrowing up to 50% of your home’s value interest-only.
This lowers your monthly payment but changes your tax situation. The interest on this part is no longer deductible because it moves from Box 1 to Box 3. And since interest rates are rising, your total costs may still increase. It’s important to discuss this carefully with your mortgage advisor.
Choosing the right mortgage provider
There are many mortgage providers on the market, so comparing options always pays off. The interest rate is usually the first thing you look at, but the conditions are just as important. The lowest interest rate does not always mean the best mortgage for you.
Ask yourself a few key questions before you choose. Do you want an interest rate that adjusts automatically when market rates drop? How much penalty-free repayment do you want to make each year? Do you want to transfer your interest rate to a new home later? How long should your mortgage offer stay valid? Are you willing to open or maintain a checking account to get a lower rate? Do you value sustainability and accept a slightly higher rate for it? And is a term life insurance policy required?
By answering these questions, you get a clearer idea of what kind of lender fits your plans and what flexibility you want for the future.
What about insurances?
During your mortgage consultation, your advisor also looks at possible financial risks and the insurances that can protect you. The most common one is term life insurance. This insurance helps your partner or dependents pay the mortgage if something happens to you. It offers peace of mind knowing they can stay in the home without financial stress.
Another important option is disability insurance. If you can’t work due to illness or an accident, your employer continues to pay at least 70% of your salary for the first two years. After that, you may receive social benefits, but these are usually lower than your normal income. Your advisor helps you understand what this means for your mortgage and whether you can still manage your monthly payments in such a situation.
Do you want to find out how your personal situation affects your mortgage options? A first orientation meeting at OHAO is always free and without obligation.
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Whether you are just getting started or already taking the next step, we will look at your situation, answer your questions, and clearly explain your Dutch mortgage options.
Bart KooijmanMortgage Advisor
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