Paying off mortgageOn May 28, 2019 by Debora Anderson
Just like any loan, you pay a substantial amount of interest on your mortgage. This is one of the reasons why you might consider paying extra on your mortgage. Logical, because a smaller mortgage debt immediately leads to lower costs. But is it wise to pay off your mortgage? And when is extra repayment on the mortgage advisable or not?
Paying off mortgage wisely?
Often extra repayments on the mortgage result in cost savings. You pay less interest if you pay off earlier. And if you use savings for repaying, this will result in extra savings if your assets are above the tax-free limit of 30,360 euros or 60,720 euros for tax partners. You pay tax on the part of your assets above this limit. If you lower your capital by putting this money in your mortgage, you will save on this tax.
Saving on interest and capital gains tax are often the biggest advantages of paying off extra on your mortgage. But of course there are even more advantages:
- You pay less interest with a lower mortgage debt.
- With a repaid mortgage you no longer have to pay a notional rental value.
- After repayment, your house is no longer a cost but a form of capital. You can use this as a pension provision or as an estate for your children.
Often, the lower your mortgage and the lower your income, the more it pays to pay off your mortgage.
Tip! You can pay off your mortgage with a gift from, for example, your parents. There are broader rules for these donations than for other donations. You can read more about this in the article ‘ Donation purchase home ‘.
Repay the mortgage or not? – Cons
There are also some disadvantages to (extra) repaying your mortgage. The main disadvantage is in the mortgage interest deduction. The less interest you pay, the lower the mortgage interest deduction. Certainly in the higher tax brackets this saves considerably.
A second disadvantage is that you lose a substantial amount of your savings if you put this in your mortgage. No problem of course if you can miss the money. But if this means that you have to take out a loan for the purchase of a car, for example, you will soon be more expensive. You pay a higher interest rate for a loan other than the mortgage.
Pay off mortgage – penalty interest
Sometimes the bank charges a penalty interest if you pay off more than 10 or 20 percent of the mortgage extra. The amount depends, among other things, on the amount of your mortgage, the amount of the extra repayment and the remaining fixed-rate period. You do not pay penalty interest if you have a variable-rate mortgage, if your fixed-rate period has expired, if you move house or if the homeowner dies.
Tip! Sometimes you also save on your mortgage if you transfer it to another mortgage provider, especially if it charges a lower mortgage interest . Certainly if your fixed-rate period has expired, this option is worth considering.
Repay the full mortgage – Sensible or not?
If you want to know for sure whether or not you want to pay off your mortgage, it depends on your personal situation. All the above factors play a role, but depending on your situation, one factor plays a greater role than the other. That is why it is important to make a good calculation of your situation before you decide whether you will pay extra. A financial adviser can help you decide what is best for you.