Repayment models

As with any loan, when you take out a mortgage you will eventually have to repay the initial loan plus the incurred interest. With some mortgage models, you immediately start repayment of the capital while also paying the interest on the initial loan, usually over a long period of time (e.g. 30 years).

Other mortgage types allow you to postpone repayment of the initial loan and to only make monthly interest payments. The two major capital repayment models are the annuities mortgage and the linear mortgage.

As of 2018, changes to mortgage rules means that double-income households can borrow more money to buy a home in the Netherlands. It means that couples who both earn an income will calculate their maximum mortgage by using 70% of the lower of their two salaries. This increased from 60% in 2017. Another change in 2018 is that people applying for a mortgage can only borrow 100% of the purchase price of a property. In 2016 it was 102%, and in 2017 it was 101%. This extra borrowing was generally used to pay the fees associated with buying a property. 

Annuities mortgage

The defining characteristic of an annuities mortgage is that you pay a lot of interest in the initial years but repay little of the initial capital loan. This reverses towards the end of the mortgage term as you begin to pay off more capital and hence less interest. With the exception of fluctuations in mortgage interest rates, you make fixed monthly payments throughout the mortgage term.

Through redemption (i.e. repaying the mortgage), the mortgage debt decreases and the amount of interest you pay decreases over time. However, this means that your net housing costs will increase slightly as only the interest on the loan is tax deductible. In the early years of the mortgage term, the annuities mortgage results in lower monthly payments than a linear mortgage.

Linear mortgage

In a linear mortgage, you repay the initial mortgage loan by a fixed amount every month. On top of this you pay interest, but the interest payments will reduce over time since you are gradually redeeming the initial loan. Since the mortgage amount will actually decrease, so will your interest payments.

A linear mortgage can be useful for people who wish to repay their mortgage as quickly as possible and who are expecting a reduction in income sometime in the future. However, the initial monthly repayments are relatively high. It is also important to note that in this model, you will not be taking full advantage of the fact that mortgage interest is tax deductible.

Alternative mortgage models

The other mortgage models available in the Netherlands are all variations on the same theme:

  • Interest-only mortgage (aflossingsvrije hypotheek): in certain circumstances the bank will allow you to only pay interest on a monthly basis and to repay the capital at a later date from savings or investment accounts. If you took out an interest-only mortgage before 1 January 2013, you can deduct the interest you pay from your income for tax purposes. But if you tool the mortgage out after that date, then the interest you pay on the mortgage cannot be deducted from your income. 

  • Life insurance mortgage (levenhypotheek): this mortgage is linked to a life insurance policy. The client pays a monthly or an annual premium, which is often invested in a mutual fund. The premium can include life insurance cover. This policy can be tax free under certain conditions.

  • Guaranteed life insurance mortgage (spaarhypotheek): This mortgage type is also linked to a life insurance policy, but with a guaranteed return. The interest you receive on your premium is equal to the interest you pay, hence you are guaranteed that your mortgage will be repaid at the end of the mortgage term. This policy can also be tax free.

  • Hybrid mortgage (hybride hypotheek): A combination of the interest-only and life insurance mortgage. With this type you can switch from a mutual fund with investment risk to a guaranteed return on your money.

  • Investment account mortgage (beleggingshypotheek): In an investment account mortgage you invest a certain premium into a stock market account. This premium can be a lump sum, a monthly or an annual premium.

  • Guaranteed savings account mortgage (bankspaarhypotheek): This type of mortgage offers a high level of security and you will save money at a fixed rate. This rate is equal to the mortgage interest rate and at the end of the term you are guaranteed to have saved enough money to repay the mortgage loan. The interest payments remain constant at their original level which means that you are also optimising your tax break. It is also possible to invest rather than save, although there is obviously an element of risk involved in investing instead of saving.

  • Credit mortgage (krediethypotheek): This type of mortgage is a flexible loan. Like a bank account, the holder can desposit and withdraw money into it. The holder pays monthly interest on the amount that was borrowed, which depends on the value of the property.

The wide variety of options in the Dutch mortgage market can make the situation overwhelming for those who are not familiar with the possibilities. The above information explains the basics but it is always advisable to seek advice from your bank or financial advisor before making a decision about a mortgage.

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