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Repayment-free mortgage

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Are you looking to buy a home? Then a mortgage plays an important role. With a mortgage you will be able to finance your home. If you know in advance the maximum amount you can borrow and the associated monthly costs, you know immediately within what budget you can start looking for your dream home. Finding the right type of mortgage may seem difficult, as there are many different types on the market. The difference between the mortgage forms is mainly in the way you repay. With the most common mortgage forms, you repay each month. However, there are also some mortgage forms where you only repay at the end of the term.

One option is an interest-only mortgage. With an interest-only mortgage, you have the lowest monthly costs because you don't make any repayments during the term and pay only mortgage interest. How exactly does this work? At Alpina.nl we explain it to you!

What is an interest-only mortgage?

An interest-only mortgage is a type of mortgage where you pay only interest until the end date of the mortgage. In other words, you do not repay the mortgage. Because you do not repay the mortgage during the term, you must repay the loan in full, in one lump sum, at the end date. However, you can choose to make repayments during the term, but you do not have to.

How does an interest-only mortgage work?

With an interest-only mortgage, you do not repay the mortgage, but pay only mortgage interest each month. Only at the end of the term do you pay off the mortgage at once. It is often possible to subsequently extend or transfer the mortgage. This means you do not have to pay off the mortgage at once. However, this varies by lender. Usually a lender will look at your income and the amount of your mortgage in relation to the value of the house.

Can you still take out an interest-only mortgage?

As a starter, you are no longer entitled to interest deductions when taking out an interest-only mortgage. However, this does not mean that it is no longer possible to take out an interest-only mortgage. This form of mortgage has become increasingly common in recent years due to low interest rates. As a result, the tax advantage you miss out on is often so small that it is interesting to take out a portion of the mortgage on a grace period. However, always get proper advice from a mortgage advisor.

Why an installment-free mortgage?

An interest-only mortgage is especially attractive because you don't have to make any repayments during the term. You only pay mortgage interest, which keeps your monthly costs low. Only at the end of the term do you pay off the mortgage at once. This saves you a considerable amount in monthly costs during the term. However, you can choose to make interim repayments. Often you can repay 10% to 20% of the mortgage amount annually without penalty. In this way you can reduce part of the final mortgage burden.

What does a grace mortgage cost?

With an interest-only mortgage, you pay only interest and, in principle, do not repay during the term. You can choose to make interim repayments so that the residual debt is reduced by the end of the term. Most lenders allow you to repay 10% to 20% of the amount per year without penalty.

It is also good to know that the grace-free portion of the mortgage cannot exceed 50%. So you can take out a repayment-free mortgage for 50% of the mortgage amount. If you buy your home for €300,000, with an interest rate of 2% and a term of 30 years, you can finance a maximum of €150,000 with an interest-only mortgage. So your monthly charges for the interest-free portion of your mortgage in that case will be 2% of €150,000. In this situation, that amounts to €250 gross per month. Of course, you will have to take out another mortgage for the other part of the mortgage amount, but an interest-only mortgage can significantly reduce your monthly expenses.

My installment-free mortgage expires: now what?

A mortgage always has a term of 30 years. An interest-only mortgage you must repay at once 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

How high can an interest-only mortgage be?

An interest-only mortgage cannot exceed 50% of the value of your home. Thus, it is not possible to take out an installment-free mortgage for the entire mortgage amount. You must repay the other 50% of the mortgage monthly. As a starter, that 50% will consist of an annuity mortgage or a linear mortgage. Taking out a part of the mortgage interest-free has the advantage that your gross mortgage burden is lower. This is especially interesting in higher mortgage rates and an overstrained housing market.

What happens to an interest-only mortgage after 30 years?

A major misconception is that an interest-only mortgage does not need to be repaid at all. During the term, of course, you only pay mortgage interest. After 30 years, however, you must repay your interest-only mortgage. You do this, for example, with your savings, by taking out a new mortgage or by moving house and using the proceeds from your house to pay off the interest on the mortgage.

How wise is a grace-free mortgage?

An installment-free mortgage is very attractive because of its low monthly costs. Of course, you don't have to make any repayments, so your mortgage costs go down significantly. However, you may be more expensive in the long run, because you do not pay off the mortgage and therefore keep paying the same amount in interest. In addition, banks often charge more interest for an interest-only mortgage because of the risk of not paying off the mortgage on time. This is reflected in your interest costs. An installment-free mortgage also carries risks. It's nice that you don't have to make monthly repayments, but at the end of the term (often 30 years) you still have to repay the mortgage in full.

A common argument for an interest-only mortgage is that first-time buyers often start earning more over time. Therefore, it is actually nice to have lower monthly expenses at the beginning of the term and only start paying more later. In addition, you may only take out a no-repayment mortgage for 50% of the mortgage amount, which means that you pay off the other part of the mortgage anyway. This reduces the likelihood that you will be left with a residual debt at the end of the term.

Whether an interest-only mortgage is wise depends on your personal situation and needs. Always get proper advice from a mortgage advisor.

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