The mortgage interest deduction has always been an important consideration when taking out a mortgage loan. In the past, the interest deduction was virtually unlimited. That made it attractive not to repay and to profit as much as possible from the interest deduction.
But because of the financial crisis that reached a low point in 2008, the government took various measures to limit ‘interest-only’. First, in 2011, the portion of the mortgage loan that banks were allowed to grant interest-free was limited. This could not exceed half of the value of the house. Subsequently, the condition for the interest deduction of new mortgages was that they be repaid in full within thirty years. As a result, the interest-only mortgage was completely excluded from the interest deduction scheme.
As a result, paying off new mortgages became the norm. In 2007, more than two-thirds of the mortgage sum was still interest-only, in 2014 more than half of the new mortgages were repaid. But the interest-only mortgage has been making a comeback in recent years: compared to 2018, the number of mortgages of which the largest part of the loan is interest-only has doubled. Last year there were almost 240,000.
‘If one hundred percent interest-free again were allowed, many people would use it’
Hans van Hoof financial advisor
An important reason for this increase is the fall in interest rates. As a result, the interest to be paid is lower than it was a few years ago and the interest deduction has become correspondingly less important. In addition, the deduction percentage also decreases every year. Because the value of homes has risen sharply at the same time, a higher amount can be borrowed without interest, for example for renovations.
That more expensive house does have a different tax effect: the notional rental value increases. This is the amount that homeowners have to add to their income and on which they have to pay taxes.
Taxable power
Financial planner Ramón Wernsen sees a change in thinking about the mortgage with this increase and the falling interest deduction. “The perception is that the interest deduction is very advantageous, but that deduction often no longer outweighs the financial burden of the repayments.”
In addition, for many of his customers, they have savings or other assets on which they have to pay tax above a certain limit. If they decide not to use the interest deduction, they can lower that taxable asset by the mortgage amount. An increase in the tax for larger assets in 2017 has made this even more interesting, explains Wernsen.
The advance of the interest-only mortgage accelerated last year. Their number increased by more than a quarter last year. According to mortgage broker De Hypotheker, especially young homeowners who already have a mortgage borrow interest-free for a renovation or to make their home more sustainable. They can do this thanks to the increase in the value of their home. Up to half of that value can be borrowed without interest, albeit without interest.
Also read: Why are interest-only mortgages so popular among first-time buyers?
Boudewijn de Jong of De Hypotheker recently had a customer who financed the renovation of an attic. The couple had bought their new-build home a few years ago for around 320,000 euros. Before that, it had already borrowed a part, 115,000 euros, without interest. Meanwhile, the house value had risen to 420,000. This allowed them to borrow the 60,000 euros needed for the renovation without paying off. After all, with an interest-only mortgage loan of now 175,000 euros, they remained below 50 percent of the value of their house.
De Jong: “Due to the renovation, it was not necessary to move, which is difficult in the current housing market. The value of the home has increased as a result of this renovation and the increase in costs has been very limited because they opted for an interest-only mortgage.”
Pension deficit
Financial planner Wernsen advises homeowners who want to borrow interest-free to use part of the money they do not repay for investment. A homeowner saves interest every month on a repaid amount, but if you invest that amount, Wernsen expects the yield to be much higher in the long term. “If you invest cheaply and spread with simple index funds with a cheap provider, it must be crazy if this is not cheaper than paying off the mortgage.”
Another destination for money left over from ‘interest-only’ is extra pension accrual, says financial advisor Hans van Hoof. “If your income is less than 68,000 euros gross per year, you will receive 37 euros back from the tax authorities for every 100 euros you invest for your pension. If you pay one and a half percent interest on your mortgage, the interest deduction is almost nothing. But half of the Netherlands does have a pension deficit.”
Risks
The advance of interest-only mortgages runs counter to efforts to reduce this type of mortgage. Encouraged by De Nederlandsche Bank, banks started a campaign a few years ago to make homeowners aware that an interest-only mortgage must one day be repaid. The bank could even demand the mortgage at the end of the term in one go.
Last autumn, the regulator warned about the risks. Low monthly payments encourage homeowners to borrow more than they would otherwise. Mortgage costs could become a problem once they retire and their income falls. After all, these are higher than if they had been repaid. DNB would like to see households use the money they have left over thanks to the low interest rates to make repayments.
Van Hoof thinks that the interest-only mortgage gives homeowners room to make their own choices in order to prevent problems later on. “It gives you much more freedom in the wallet and you can save in a different way. If one hundred percent interest-free were allowed again, I think a lot of people would use it.”