How does an annuity mortgage work?
With an annuity mortgage, you pay the same amount each month throughout the fixed interest rate period. This amount consists of both interest and repayment. When you first take out the annuity mortgage, the monthly payment mainly consists of interest. However, as you repay a portion of your loan each month, the composition of interest and repayment changes over time. The interest portion of the monthly payment decreases while the repayment portion increases. Towards the end of the mortgage term, the monthly payment mainly consists of repayment and a smaller portion of interest.
Net monthly payments increase with an annuity mortgage
As described above, you pay the same amount each month, which is the gross monthly payment (before deducting mortgage interest tax relief), and this remains constant during the fixed interest rate period. You can deduct the interest portion of your monthly payment as a tax deduction. However, as the interest portion decreases each month, you have slightly less mortgage interest tax relief each month. As a result, your net monthly payments increase during the mortgage term.
Eligibility for mortgage interest tax relief with an annuity mortgage
Since 2013, the rules for eligibility for mortgage interest tax relief have changed. This means that if you take out a new mortgage today, you can only deduct the interest for tax purposes if you choose a mortgage type that allows you to repay the loan in monthly installments over a maximum period of 30 years. The available repayment options for this are an annuity mortgage or a linear mortgage. If you have a different type of mortgage (such as an interest-only mortgage or a savings mortgage) from before 2013, you can use transitional arrangements, and mortgage interest tax relief applies to that mortgage as well. If you increase your old mortgage, for example, because you want to renovate, then that increase will be financed with an annuity or linear mortgage if you want to use mortgage interest tax relief.
Features of the annuity mortgage
- The annuity mortgage has a fixed end date You repay every month during the mortgage term Your monthly payments (interest and repayment) are the same every month You are certain that you will repay the mortgage. Advantages of an annuity mortgage
- You have fully repaid your mortgage at the end of the term Your gross monthly payments remain the same during the term You have a lot of interest tax relief at the beginning of the term Disadvantage of an annuity mortgage
- Interest tax relief decreases during the term
- Your net monthly payments increase during the term
What do others choose?
Today, most people choose an annuity mortgage. Of course, this does not mean that this is the best choice for you. The net monthly payment is lower at the beginning of the term with an annuity mortgage compared to, for example, a linear repayment. This makes the annuity mortgage attractive to many first-time buyers who often borrow the maximum amount and therefore benefit the most from mortgage interest tax relief at the beginning. However, if you look at the costs over the entire mortgage term, you will ultimately be better off with a linear mortgage. This is because you repay the mortgage faster, resulting in less mortgage interest payments during the term.
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