Mortgage matters - Part 1

If you have decided to buy a house in the Netherlands, you are faced with the question of what will be the most appropriate type of mortgage. This of course depends on your tax position and whether you are likely to move again (any time soon).

In these paragraphs we offer a brief explanation of the relevant types of mortgages available in the Netherlands. In Mortgage matters - Part 2, we will also provide a few recommendations as to which types are best suited to your specific tax status.

Types of mortgages in the Netherlands

Usually mortgages in the Netherlands have a duration of 20 or 30 years. Five categories can be distinguished. Below, each of these forms will be briefly discussed. Special attention will be given to the tax consequences and the life insurances.

› Mortgage with linear redemption

The most important characteristic of this mortgage is that the loan is repaid yearly in equal instalments (i.e. linear). As a result of the repayments, the amount of interest payable diminishes every year. Since the interest expenditure decreases steadily, this mortgage is best suited for borrowers who cannot fully benefit from the tax relief on the interest payments.

› Annuity mortgage

The chief characteristic of an annuity mortgage is that the yearly total of redemption and interest payments remains the same throughout its duration. Although the total remains the same, the mix of interest and redemption of course changes over the years. Owing to this balance between interest and redemption, the redemption is not on a linear basis.

In the first years, the amount paid by the borrower consists mainly of interest payments. Hence there is a large tax relief in the initial years. Consequently, an annuity mortgage is ideal for people who wish to have a large tax relief in the early years and expect to have a sufficiently high income in later years to be able to make the redemption payments that do not qualify for tax relief.

› Endowment mortgage (Levenhypotheek)

With an endowment mortgage, no repayments are made during the term of the mortgage. Instead, the whole loan is redeemed in a single lump sum at the end of the term. The redemption is financed by means of a with-profits endowment policy that matures on the expiry date of the mortgage.

The endowment policy is used to generate capital. Usually, a part of this capital is guaranteed at the end of the term and the remainder is made dependent on the investment return.

If the borrower dies before the expiration of the mortgage, the included life insurance will pay out a lump sum. This may be based on the capital insured under the endowment policy. It can be equal to either the amount saved under the endowment policy or some other criterion, depending on the borrower’s wishes.

› Special endowment mortgage (Spaarhypotheek)

This is a variation on the Endowment Mortgage. It too provides for a lump-sum redemption of the mortgage loan at the end of the term.

The distinguishing feature is that the interest rate on the loan is exactly the same as the gross rate of return on the investment under the endowment policy. This means that at the end of the term, the capital saved exactly matches the principal of the mortgage loan. There is neither an upside nor a downside potential.

A Special Endowment Mortgage is therefore a no-risk mortgage and is ideally suited for those of limited financial means. A potential disadvantage when compared to the ordinary endowment mortgage is that the loan, endowment and life insurance are inseparably linked. This reduces the investment flexibility.

› Banksparen mortgage (SEW)

Instead of an endowment policy, a special savings or investment account is linked to the mortgage. This type of mortgage is only possible in the case of immovable property and a related mortgage; at the end of the term, the savings must be used for paying off the mortgage. Payments must have been made into the account for a period of at least 15 years, and the highest payment may never exceed ten times the previous payment.

The maximum payment exemption will be 151.000 euros (after 20 years) and 34.300 euros (after 15 years). If the SEW no longer meets (one of) these conditions, the interest accrued on your payments will be taxed in accordance with the progressive tax rates in Box 1 of the income tax system.

This is something you must keep in mind, as you could otherwise end up paying a 42 or 52 percent tax on the accrued interest in your bank savings. If you are eligible for the 30% ruling (or a knowledge migrant), the tax department might show some flexibility when it comes to interpreting above rules.

› Interest-only mortgage

Here, no redemptions take place during the term of the mortgage. It is usually part of an ordinary Endowment Mortgage. This mortgage is not discussed further here.

This is the first part of the "Mortgage Matters" article written by Stephanie Dijkstra, editor-in-chief of The XPat Journal. Have a look at the current issue or subscribe here.

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› Mortgage matters - Part 2 | Dutch tax issues for expatriates