Interest-only mortgage: how it works, the rules and the risks

What exactly is an interest-only mortgage?

With most mortgage types, your monthly payment consists partly of interest and partly of repayment, so your debt steadily shrinks. With an interest-only mortgage, you skip the repayment. You pay nothing but interest, and at the end of the term (usually 30 years) the entire loan is still outstanding. You then have to repay that amount in one go, for example with savings, the proceeds from selling your home, or a new loan.

How much can you borrow interest-only? The 50% rule

Many lenders work from the principle that at most around 50% of the market value of the home can be financed interest-only. This is not a general legal limit that works out exactly the same for every mortgage. What's actually possible varies by lender, mortgage type and situation. And if your mortgage comes with the Dutch National Mortgage Guarantee (NHG), separate conditions apply on top of that.

An example: you buy a terraced house in Tilburg-Noord with a market value of €350,000. At most €175,000 of that can be financed interest-only. You do repay the remaining part of your mortgage during the term.

Mortgage interest deduction: what has applied since 2013?

Since 1 January 2013, the repayment requirement has applied: to keep your right to mortgage interest deduction (the Dutch tax break on mortgage interest), you must repay a new loan in full within a maximum of 30 years, on at least an annuity or linear schedule. An interest-only portion by definition fails that test, so the interest you pay on a new interest-only portion brings you no tax benefit. You carry the full interest cost, with no discount through your tax return.

Interest-only before 2013? Transitional rules apply

If you already had an interest-only mortgage before 1 January 2013 and it hasn't been increased since, the old rules still apply to you. You keep your right to mortgage interest deduction on that part, for up to 30 years from the moment you took out the loan, without having to repay anything. As soon as you refinance that mortgage with another lender or increase it, the post-2013 rules do apply to the new or additional part.

The risks: what should you watch out for?

No repayment means no equity building in your home through your mortgage. Your debt stays exactly the same for thirty years, while your neighbours with an annuity mortgage own a little more of their house every month. At the end of the term, you have to repay the full amount or extend your mortgage, and depending on your income, your age and the value of your home at that point, that's not always a given. Your monthly costs can also rise sharply once your fixed-rate period ends and you have no interest deduction on the interest-only part. In short: lower costs now, but an obligation you're pushing into the future.

Wondering whether an interest-only mortgage fits your situation?

Whether you're buying your first home in Tilburg or ready for your next step, we're happy to work out what an interest-only mortgage would mean for your monthly costs and your tax return. Get in touch for a no-obligation consultation: call us on 06 52 69 88 22 or email Martin@belderbrandt.nl and we'll think it through with you.