What is an interest-only mortgage?
An interest-only mortgage is a type of mortgage where you only pay interest on the principal and no repayment of the principal is made during the term of the loan. Repayment of the principal is due at the end of the loan term.
Characteristics of an interest-only mortgage:
- During the term of the mortgage, you only pay interest and do not automatically pay down the principal.
- At the end of the loan term, you must repay the entire principal in one lump sum.
Transitional arrangement for interest-only mortgages (after 1-1-2013)
As a first-time buyer, you are only entitled to full mortgage interest tax deduction if you repay the loan through an annuity and/or linear mortgage. This does not apply to existing interest-only mortgages. However, there is a transitional arrangement that allows for exceptions.
The transitional arrangement for existing owner-occupied debt applies to the debt that existed on December 31, 2012. The owner-occupied debt is the part of the mortgage or loan for which you can deduct interest. This can only be a mortgage or loan that relates to your own home, such as its purchase, improvement or maintenance.
Taking out an interest-only mortgage?
Interest-only mortgages are becoming increasingly popular again due to low interest rates. However, the tax benefit is small when taking these low rates into account. Therefore, it is wise to seek professional advice before making a decision.
Repaying an interest-only mortgage (in one lump sum):
After the loan term, usually 30 years, depending on your personal situation, you have the following options:
- You have built up equity and use it to pay off the mortgage debt
- You take out a new mortgage to pay off the old mortgage
- Your personal situation may have changed, for example, your children have moved out and you want to downsize. You sell your home and use the proceeds to pay off the mortgage debt
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