Interest-only mortgage

What is an interest-only mortgage?

The meaning of an interest-only mortgage is actually quite simple since the name already largely says what this mortgage product does. This is because an interest-only mortgage is a form of mortgage where you are not obliged to repay during the term. You only have to pay interest each month. At the end of the mortgage term (usually 30 years) you then have to repay the entire loan in one installment.

Features and conditions of an interest-only mortgage

During the term of your interest-only mortgage, the following rules apply:

• You only have to pay interest;
• You do not repay the mortgage;
• At the end of the term, you have to repay the entire mortgage at once.

Advantages and disadvantages of an interest-only mortgage

An interest-only mortgage has the following advantages:

• Because you pay no repayment during the term, you have relatively low monthly costs.
• If you took out an interest-only mortgage before 2013, you can take full advantage of the mortgage interest  tax deduction.

But an interest-only mortgage also has drawbacks:

• The interest rate on an interest-free mortgage is often a bit higher than on mortgage types where you do make repayments;
• You cannot (since 2013) make use of the mortgage interest tax deduction;
• At the end of the term, you have to repay the entire mortgage at once.

Interest-only mortgage after 2013

Nowadays, you are allowed to take out an interest-only mortgage up to a maximum of 50 per cent of the house value. It is no longer possible to finance your new home with just an interest-only mortgage.

If you (as a first-time buyer) take out a partially interest-only mortgage after 1 January 2013, you will not be entitled to the mortgage interest tax deduction This is because, since 2013, you are only entitled to mortgage interest tax deduction if you repay the mortgage on the basis of an annuity or linear mortgage.

However, an exception is possible for existing interest-only mortgages, as there is a transitional arrangement. The transitional arrangement for (existing) home equity debt applies to the home equity debt that existed on 31 December 2012. The owner-occupied housing debt is the part of the mortgage or loan on which you are allowed to deduct the interest. This is only a mortgage or loan related to your own home, for example to purchase, improve or maintain the home. Do you use part of the mortgage or loan to furnish your home, for example? Or to buy a car? Then this part is not part of your owner-occupied home debt.

In the absence of an owner-occupied home debt on 31 December 2012, the transitional law also applies to:

• the owner-occupied home debt that existed in 2012 immediately prior to the disposal of the owner-occupied home and the new owner-occupied home debt arose in 2013 at the latest;
• the owner-occupied home debt incurred in 2013 due to an irrevocable purchase agreement signed in 2012;
• the owner-occupied home debt incurred in 2013 as a result of an irrevocable construction and/or renovation contract signed in 2012;
• the owner-occupied home debt existing before 31 December 2012 prior to a disposal as a result of a rental of the former owner-occupied home, to the extent that the home will be used as an owner-occupied home again before 2021;

Can you still take out an interest-only mortgage?

Just because you no longer have a mortgage interest deduction when taking out a new interest-only mortgage now, does not mean that you can no longer get an interest-only mortgage. This form of mortgage was increasingly common due to the low interest rates. The tax advantage that someone then loses is often so small that it is interesting to keep (part of) the mortgage interest-free. However, always get good advice from one of our mortgage advisers on whether it is wise to do so in your case.

What happens when your interest-only mortgage matures?

There will come a time when the term of your interest-only mortgage expires, usually after 30 years. Your mortgage must then be repaid in one lump sum. Depending on your situation, there are several options at that time, such as:

• Extra repayment. You have built up equity and you use this to repay the mortgage debt.
• New mortgage. You take out a new mortgage to pay off the old one.
• Moving house. Your personal situation may have changed: the children may have left home and you may want to downsize. You sell your house and use the proceeds to pay off the mortgage debt.

Repay an interest-free mortgage or not?

People often wonder whether interim extra repayments on the interest-free mortgage are wise. The answer is yes, paying off extra on your mortgage is almost always wise. Just check with your mortgage lender what the conditions are for extra repayments and preferably seek advice from a mortgage adviser.