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Mortgage repayment

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A mortgage is a loan you take out to pay for your home. You must also repay this loan, at the end of the mortgage term, to the mortgage lender. In most cases, you pay a monthly amount: the monthly mortgage payment. This amount consists of part repayment and part interest. When you take out the mortgage, you agree on a term. At the end of this period, the mortgage debt must be repaid. Often the term is 30 years. At the end of these 30 years, you will have repaid the mortgage in full. You can also choose to make additional repayments so that you pay off the entire mortgage amount early and are thus mortgage free sooner. In this article at Alpina.nl we will tell you all about (extra) mortgage repayment and how it works.

Why pay off mortgage?

As mentioned, a mortgage is a loan to buy a home with. When you buy a home, you borrow money from the bank to help finance the home. Such a loan is officially called a mortgage loan. The amount you borrow from the lender for your mortgage must also be repaid. This is called mortgage repayment. In most cases, mortgage repayment is done monthly, through monthly mortgage payments. Within the agreed number of years, you repay the mortgage in full. With most mortgages, it is possible to make additional repayments. By paying off extra, you have paid off the entire amount early.

When to pay off mortgage?

In the Netherlands, it is common to choose a 30-year term. After the term, the mortgage is then fully repaid. With a term of 30 years you have ample time to pay off the mortgage and the monthly costs often remain manageable. Also, the term is not too long, so in most cases you can pay off the mortgage before you retire. Of course, this depends on when you take out your first mortgage. If you are 30 when you take out your first mortgage, the mortgage will be paid off around age 60. By that time, your housing costs will drop significantly and you will be able to live inexpensively. This is nice, because often your income drops around that time or you get state pension at some point.

You can also choose a 40-year term with some lenders. The advantage of this is that the repayment is spread out over a longer period of time, making the monthly costs lower. Of course, it takes you longer to repay the mortgage amount and therefore you pay longer interest. In addition, a shorter term is sometimes possible. For example, you can repay the mortgage within 20 years. The maximum mortgage you can get with a shorter term does become lower, because your monthly expenses naturally increase.

There are also mortgage types where you do not repay at all during the term of the mortgage, but only at the end. You must then repay the entire amount at once or take out a new mortgage.

How does extra redemption work?

You can also choose to repay more than you agreed beforehand. We call this extra repayment, also called early or accelerated repayment. Every year you can repay a part of the mortgage debt penalty-free. How much you can repay varies per mortgage and mortgage lender. Usually you can repay between 10% and 20% of the mortgage debt per calendar year without penalty. You can make monthly repayments or make a lump sum payment. By making additional repayments, you reduce your monthly amount or shorten the term of your mortgage. If you repay more than the maximum amount, you sometimes have to pay a penalty. Each lender has its own rules for this. So before you pay off more, check the conditions of your own mortgage lender.

How fast to redeem?

Of course, everyone wants the lowest possible monthly expenses. That is why it seems wise to pay off your mortgage quickly, provided you have the money to do so. Whether rapid repayment is wise depends, among other things, on your personal situation and what type of mortgage you have. Once you put money into your mortgage, it is fixed. That's why it's important to think about this carefully and list all the pros and cons. Also figure out how much you want and can repay. For example, you can set aside a fixed amount per month in a separate savings account. Often you can only redeem a few hundred euros or more. When you have saved enough, you can pay off another part of the mortgage.

Of course, it is also important that you also keep a good buffer behind you and continue to save for this. If unexpected (large) expenses come up, you can't get back the money you used to make extra repayments. This is then sitting in your house. In short, rapid repayment sounds attractive, but think about it carefully and also look at your plans for the future.

Cost of early repayment

Each calendar year, you are allowed to repay an additional percentage of the mortgage debt penalty-free. Often this is 10% to 20% of the principal, with no fee. If you repay more than the penalty-free portion, you usually have to pay penalty interest.

There are a number of situations in which you can redeem penalty-free:

  • Upon payment of a life insurance policy
  • At the end of your fixed-rate period
  • When selling or foreclosing on your home
  • Upon the destruction of your home, such as by fire

There are also some mortgage originators who have included in their mortgage terms that you do not have to pay a penalty if you pay off the mortgage from your own funds.

Repaying an interest-free mortgage

Do you have a (partially) redeemable mortgage? Then, in principle, you do not make interim repayments, but only pay interest. An interest-only mortgage must be repaid in one lump sum after 30 years. Depending on your personal situation, there are often several options:

  • Repayment: You can pay off the mortgage amount at the end of the term in one lump sum, such as with your savings
  • Taking out a new mortgage: You take out a new mortgage, paying off the old mortgage
  • Moving: If you plan to move to a new home, for example because you want to live smaller or on one level, you can sell your home and pay off the mortgage with the proceeds from the sale

However, you can also choose to make additional repayments on an interest-only mortgage in the interim.

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