The interest-only mortgage
What is an interest-only mortgage? As the name interest-only mortgage indicates, the borrower does not repay during the term of an interest-only mortgage. The borrower also does not build up capital within the mortgage during the term of the mortgage in order to repay the interest-only loan at the end of the term at once.
Because the lender does not have to repay and / or accrue, the interest-only mortgage entails the lowest monthly costs in the short term. This is the main reason that the interest-only mortgage has always been a very popular type of mortgage. However, since the debt is still fully outstanding at the end of the term, the interest-only mortgage is a relatively risky mortgage. The risk is exacerbated due to the fact that the interest deduction on a mortgage currently amounts to a maximum of 30 years. At the end of those 30 years, the borrower will have to pay off the mortgage by selling the home or the borrower will have to take out a new loan. This time, however, without the tax deductions, which means that the net mortgage interest costs will become a lot higher.
Compare current mortgage rates of the interest-only mortgage
Taxation related to interest-only mortgage: Partly because of the higher risks, the mortgage rules have been adjusted from 2013. Since then, the interest-only mortgage is no longer allowed for starting buyers. If they choose to do so, they do not have a mortgage interest deduction . To get a mortgage interest deduction, startups must opt for an annuity mortgage or a linear mortgage . That is why the interest-only mortgage is only interesting for homeowners who bought before 2013.
But the interest-only mortgage is not unlimited for the previous homeowners either. Many mortgage institutions do not consider a completely interest-only mortgage desirable. An interest-only mortgage should typically not exceed about 50% of the market value of your home. For the excess, a different type of mortgage is often chosen where capital is repaid or capital is built up.
Advantages of an interest-only mortgage:
- low monthly costs; the interest-only mortgage is the cheapest mortgage type in terms of monthly costs;
- usually no compulsory insurance;
- fiscally interesting; there is no repayment obligation, which can be interesting in particular in connection with the tax deductibility for higher incomes (provided the interest-only mortgage was taken out before 2013).
Disadvantages interest-only mortgage:
Overview of other mortgage types
- the entire debt is still outstanding at the end of the term;
- because there will usually not be repayments, no capital growth takes place in addition to any surplus value;
- after retirement, there is a chance that your net expense will increase due to a reduction in tax deductions;
- the interest-only mortgage is hardly interesting for starting homebuyers from 2013, because the mortgage interest on this mortgage is then not deductible.
Overview of the current mortgage interest rates of the interest-only mortgage