Keep-to-let mortgage: How does it work?

The new trend

The keep-to-let trend is becoming more and more popular among private homebuyers in the Netherlands.

According to Kadaster (public land register), homeowners held approximately 62.000 homes for keep-to-let, and 75.000 homes were bought as an investment in the past ten years. Yet, the difference between these two forms is becoming smaller because keep-to-let gradually increases and buy-to-let decreases. The transfer tax changing from 2 to 8 percent decreased the number of buy-to-let transactions in 2021.

Why do so many people keep their property?

The most significant benefit of keeping your property is that the rental income is not taxed because the property moves from box 1 (taxable income: employment and owner-occupied home) to box 3 (capital tax: savings and investments). Also, keeping the property doesn't involve substantial additional costs.

Furthermore, the rental property moves from box 1 (work and income) to box 3 (assets).

How to keep-to-let

Some important things to consider when deciding to enter into a keep-to-let situation:

1. The financing conditions, such as interest rates and repayment, change because it is no longer an owner-occupied home, so the bank's exposure increases
2. Interest paid is not tax-deductible
3. When you rent out a property, you must think about the tenancy agreement, what rights and obligations the tenants have, how to determine the amount of the rent, etc. A certified real estate agent can assist you in estimating the expected rent and finding a tenant.
4. The return on your investment depends on numerous factors, including the rent, financing, and maintenance costs.

Keep-to-let interest rates

Keep-to-let mortgage rates are higher than owner-occupied mortgage rates. As a rule of thumb, the difference is around +1%. Since you can never borrow 100% of the property's value, currently, an example of a fixed interest rate for ten years is about 2.5%. You can also change the duration back to 30 years, which lowers the monthly payments to the lender.

Mortgage penalty

When you transfer a residential mortgage to a keep-to-let mortgage, you pay an early repayment penalty to your existing mortgage lender. Your new lender repays the existing mortgage with your new keep-to-let mortgage. The prepayment penalty depends on a few factors:

1. The fixed term of your rate at your current lender
2. The mortgage rate
3. The difference between your interest rate and the current interest rates
4. Mortgage lender terms

Please note: not all mortgage lenders offer keep / buy-to-let mortgage products. 

Buy-to-let and upcoming new regulations.

Purchase protection is a popular topic these days. The big cities aim to protect the real estate market by implementing new regulations.

For example, big cities such as Amsterdam and Rotterdam are planning to introduce the following plans as of January 1, 2022:

1. Self-occupancy obligation in 16 neighbourhoods of Rotterdam for people who buy a house with a WOZ value of up to 355.000 euros.
2. Purchase protection in Amsterdam for rental purposes below a WOZ value of 512.000 euros.
3. Other cities, including Den Hague and Utrecht, are also working to introduce purchase protection by the beginning of 2022.