An interest-only mortgage offers advantages in the short term in particular: because you do not pay off, your monthly payments are lower than with other forms of mortgage and you benefit most from the mortgage interest deduction. But after 30 years the right to mortgage interest deduction expires, while you are still left with the same mortgage debt. More and more homeowners are realizing that this also has disadvantages, especially now that the mortgage rules have been tightened. Why would you convert your interest-only mortgage and what options do you have?
Pay attention! From 1 January 2013, you must choose an annuity mortgage or a linear mortgage to be eligible for the mortgage interest deduction. You can convert an interest-only mortgage into a savings mortgage until 1 April 2013, while retaining the mortgage interest deduction. After this date, you can only convert your interest-only mortgage into a linear or annuity mortgage with retention of the mortgage interest deduction .
Convert interest-only mortgage – Why?
If you convert your interest-only mortgage to a type of mortgage where you do pay off, you avoid having a mortgage debt after the maximum period of mortgage interest deduction. Your monthly charges would increase considerably after these 30 years, because you will continue to pay the mortgage interest but will not receive compensation from the mortgage interest deduction. And that while the retirement age is approaching and your income is therefore declining. With a repaid mortgage, your monthly expenses will decrease, because you no longer have to pay interest and repayment.
Convert interest-only mortgage to savings-based mortgage
Until 1 April 2014, you were allowed to convert your interest-only mortgage while retaining the mortgage interest deduction into a savings mortgage. This type of mortgage means that you save money in a special bank savings account, with which you pay off the mortgage debt after at least 15 or 20 years. You receive a savings interest on the balance and you also make maximum use of the mortgage interest deduction because you are in fact not yet paying off.
Since 2017 there are no more time slots for the capital gains tax exemption and only the high exemption applies. For 2019 this is 164,000 euros per person. So you build up tax-free capital with savings interest to pay off your mortgage later.
Converting your interest-only mortgage to a savings mortgage does result in higher monthly payments. Instead of just paying interest, you also put money into the savings mortgage on a monthly basis to repay the mortgage later. You should be able to bear these higher monthly costs if you choose this option.
Transfer interest-only mortgage to other forms
After 1 April 2013, you can still convert your interest-only mortgage into an annuity mortgage or a linear mortgage. This option increases your monthly expenses more than if you opt for a savings mortgage, so not everyone can opt for this option. You immediately start paying off if you choose one of these mortgage types, so you know for sure that you have repaid the full mortgage debt after 30 years.
Is it wise to convert my interest-only mortgage?
Whether or not converting your interest-only mortgage depends on whether you can bear the higher costs. So take a good look at your financial situation before you decide what to do. Be especially advised by a mortgage adviser, so that you are sure that you are making the best choice for your situation. This advice does entail costs, just like the actual conversion. You pay notary fees for this.
If you decide not to convert your interest-only mortgage, there is another option to prevent a residual debt after the mortgage interest deduction period. You can repay 10 to 20 percent of your mortgage each year without penalty. By saving for additional repayments yourself, you can redeem the interest-only mortgage without further penalty or costs for the conversion.