More and more Dutch people use part of their savings to repay the mortgage extra. But is this also wise? Many people think that paying extra is always worthwhile if the savings interest that you receive is lower than the mortgage interest that you pay. But there are more things to take into account, such as your mortgage interest deduction and the capital yield tax.
Suppose you have 35,000 euros in savings and a mortgage debt of 200,000 euros. You pay 4.5 percent mortgage interest that you deduct from income tax at 42 percent. You currently receive 1.6 percent interest on your savings. Now you want to repay an additional 20,000 euros on your mortgage. The table below shows what extra repayments mean for your financial situation.
|_||Do not pay extra||Repay € 20,000 extra|
|Mortgage debt||€ 200,000||€ 180,000|
|Paid mortgage interest||€ 9,000||€ 8,100|
|Mortgage interest deduction||€ 3,780||€ 3,402|
|Total mortgage costs (mortgage interest – / – mortgage interest deduction||€ 5,220||€ 4,698|
|Savings balance||€ 35,000||€ 15,000|
|Savings interest received||€ 560||€ 240|
|Taxable capital (savings balance – / – tax-free capital)||€ 13,861||€ 0|
|Capital return tax (1.2% of taxable capital)||€ 166||€ 0|
|Savings income (interest – / – tax)||€ 394||€ 240|
|Balance of the mortgage costs and the income from the savings||€ 4,862||€ 4,458|
The extra repayment gives you a saving of 404 euros per year in this case.
Note: The above is just a calculation example. Whether extra repaying is also more beneficial to you than saving, depends on your personal situation. Always make a good calculation with your own financial data together with a financial adviser before you make a choice.
Apart from your financial situation, there are other things that you have to take into account when choosing between saving or paying off extra on your mortgage.
Do you want to buy a more expensive house in the future than the one you live in now? Then an extra repayment on your mortgage can put your mortgage interest deduction at risk. After all, if the repayment of your mortgage debt is lower than the value of your home, you must invest the surplus value in the new home after the sale. If you do not do this, you may not deduct any mortgage interest from the tax on the part of your mortgage equal to the surplus value.
In addition, you can repay a maximum of 10 to 15 percent of the outstanding mortgage sum for free at most banks and mortgage providers. If you pay more, you pay a penalty interest. So ask your mortgage provider or financial adviser about the possibilities for free extra repayments.