What type of mortgage and fixed rate period should I choose?

Have you found your dream home? Then it's time to take out a mortgage. When you take out a mortgage, you choose a mortgage type and an interest rate period. When you buy a home, you may deduct the mortgage interest from your income during your tax return. Here, the mortgage form is important. If you want to take advantage of the mortgage interest deduction, you can choose between an annuity mortgage and a linear mortgage. With other mortgage types you are not entitled to mortgage interest deduction.

What types of mortgages are there?

A mortgage comes in different shapes and sizes. The mortgage form you choose determines how you pay off the mortgage. The most common mortgage forms are an annuity mortgage and a linear mortgage, because here, as mentioned, you can take advantage of mortgage interest deductions.

Annuity mortgage

With an annuity mortgage, you pay a fixed amount each month over the term of the mortgage. This amount consists of part interest and part repayment. At the beginning of the term, you pay mainly a lot of interest, but later you start paying more in principal.

Linear mortgage

With a linear mortgage, you pay off the same amount each month throughout the term. In addition, you pay interest. Your monthly costs are relatively high in the beginning, because you pay interest on the entire loan. The gross amount decreases during the term, because more and more mortgage is repaid and therefore you pay less and less interest.

Repayment-free mortgage

It is also possible to finance your home partially with an interest-only mortgage. The redemption-free part may not exceed 50% of the value of the home. With an interest-only mortgage, you only pay interest on this part. This gives you a lower gross monthly charge. Keep in mind that you cannot deduct the mortgage interest if you took out your interest-free mortgage after 2012. A disadvantage of an interest-only mortgage is that you do not make any repayments, although you will have to repay the loan at the end of the term.

What about pre-2013 mortgages?

If you have a mortgage taken out before 2013, the conditions that were in place then apply. You may deduct the mortgage interest for a maximum of 30 years. This also applies to a savings and life mortgage. Such another mortgage you can often move with you when you buy another home.

Which fixed-interest period?

When you take out a mortgage, you choose an interest rate fixed period. The fixed-rate period is the period during which your mortgage interest rate is fixed and therefore remains the same. When mortgage interest rates are low, many people choose to fix the mortgage interest rate for a longer period, such as 15, 20 or 30 years. The advantage of this is that you know exactly what your monthly costs will be for a longer period of time.

However, there is also a downside to fixing your fixed-rate mortgage for a long time. If you want to change something on your current mortgage during the fixed-rate period, you may have to pay a penalty to the mortgage lender. This penalty can be substantial, depending on the mortgage amount and the remaining period for which the mortgage rate is fixed.

Questions?

A mortgage is always customized. Our mortgage advisors can give you expert advice on the best type of mortgage and fixed-interest period for your personal situation. Please contact us with all your mortgage questions.