Choosing the right mortgage

Annuity, linear or interest-only mortgage?

There are roughly taken three main mortgages to choose from: annuity, linear and interest-only mortgages. Both an annuity and a linear mortgage can be repaid in full within the same term (usually 30 years), the difference between them is in the way of repayment. With an annuity you pay a fixed amount per month, consisting of interest and repayment. The ratio between these two changes on a monthly basis, because you pay off something every month, you pay less and less interest and therefore more repayment. With a linear mortgage you pay a fixed repayment every month, the interest is added to this. The monthly costs for a linear mortgage are higher in the beginning compared to an annuity. But this repayment form is cheaper if taken over the entire term. With an interest-only mortgage you only pay interest. But the name is somewhat misleading, because at the end of the term this type of mortgage must also be repaid.

If the acquired house is not your first home and if you took out your mortgage before 2013, you can deduct the mortgage interest without being obliged to repay this amount monthly. Are you buying your first home, or did you buy your previous home after 2012? Then you are only entitled to mortgage interest deduction if you repay the debt on an annuity or linear basis over a maximum of 30 years. Nevertheless, starters also regularly opt for a partially interest-only mortgage.

So, if you want to take maximum advantage of the mortgage interest deduction, you must in many cases repay your mortgage on an annuity and/or linear basis. Not everyone has the need to pay off the entire mortgage in a maximum of 30 years. If this is also the case for you, you might consider to borrow up to 50% of your home value interest-free. This can make a significant difference to your monthly payment, but it does have tax consequences. This part of your mortgage no longer falls under the home acquisition debt in box 1, which means that you cannot deduct the interest and that this part counts as debt in box 3. Since interest rates are currently rising, the monthly costs might rise as well. So make sure you are always well informed by a mortgage advisor.

Calculate your maximum mortgage

A fixed interest rate

Within the term of your mortgage you can choose to fix the interest for a certain period of time, this is called the fixed interest period. You can also choose not to fix the interest rate, then you will receive a variable interest rate. If you fix the interest rate for at least 10 years, your maximum mortgage will be tested against the actual interest rate, if you set the interest rate for less than 10 years fixed or variable, it will be tested with 5% interest and you can borrow less. The longer you fix the interest, the longer you have certainty about your monthly payments. A longer fixed-interest period usually means a higher interest rate, so you actually pay more for the extra security. Many people have opted for a longer fixed-interest period in recent years, because interest rates were historically low. Moreover, many lenders allow you to move your interest to the next home. Please note, transferring the interest is only possible for the remaining amount of the mortgage, for everything that you borrow extra, you will receive the interest of that moment. It is wise to compare the monthly payments for different mortgage types and fixed-rate periods, so that you can make a well-considered decision.

Which mortgage provider should I choose?

There are many parties active on the mortgage market where you can apply for a mortgage, so it certainly pays to compare. The most important factor in your choice is often the interest you will pay, so a comparison will always start with this. The next thing to consider are their conditions, depending on your wishes and options. It might turn out the lender with the lowest interest rate is not your best match depending on their conditions. To prepare yourself for this choice, you can already ask yourself the following questions:

Do I prefer an interest rate that will be automatically adjusted when rates drop?
How much penalty free repayment do I want per year?
Do I want to be able to move the interest to my next home?
How long should my quote be valid?
Am I willing to keep a checking account or even open a new one for the lowest interest rate?
Is it important to me that the lender has a well-known name, or has been active for some time?
Do I think sustainability is important and am I willing to pay a slightly higher interest rate for this?
Am I willing to take out a mandatory term life insurance?

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Insurances

During the consultation with your mortgage advisor we will discuss all the possible financial risks. Most people immediately think of term life insurance. That is logical, of course, because in most cases it would be very difficult to continue paying the mortgage if you were left alone, or if your dependents inherit the house including the mortgage from you and they have to continue paying the mortgage. With a term life insurance you can (partially) cover this risk, so that you leave your partner and/or your next of kin in financially better situation.

Another, less thought of but equally important insurance, is the disability insurance. The first two years of your disability, your employer will continue to pay at least 70% of your last salary. After this period you might get social benefits, but this will always be less then you were used to earn working in employment. During an consultation with your advisor we will take a thorough look at what such a situation would mean for you and the repayments of your mortgage.

Would you like to know how your situation affects your options? A first orientation meeting at OHAO is always without obligation. Make an appointment with one of our mortgage advisors here.