Savings-based mortgages: What you should know

Before 2013, hardly any annuity-based mortgages were taken out. It was fiscally more advantageous to take out an interest-only loan in combination with a savings-based insurance policy (or savings account).

The return on this savings account is tax-free, as long as a number of conditions are met. An important condition is that a monthly deposit must be made for 15 or 20 consecutive years to be able to take advantage of this small or large exemption.

Savings-based mortgage requirements waived

As of April 1, 2017, the requirement mentioned above has been waived. This means that every savings-based insurance policy or savings account can be redeemed at any time, tax-free.

The value accrued will become available and this redemption value will be deducted from the active mortgage. The savings-based mortgage will then be converted into a fixed-rate mortgage.

Redemption can be attractive, but is it sensible?

The question is whether it is sensible to redeem these products and lower the mortgage. Redemption can be attractive, particularly at a new (lower) interest rate.

The monthly deposit for the savings-based insurance policy or savings account will increase considerably to reach the same savings capital at the end date, with a lower interest rate.

The advantage of the lower interest rate will be partially muted by the higher monthly deposit. Moreover, by means of partial redemption of a mortgage with a surrender value, the bank might be prepared to offer an interest rate discount.

After all, the bank runs less risk with a lower mortgage in proportion to the market value, and that lower risk can translate into lower interest (at some banks, 0,5 percent per year).

Disadvantages of redemption

Along with these advantages, the disadvantages should also be looked at.

If the redemption value is deducted from a savings-based mortgage, this mortgage will be continued as an annuity-based mortgage with rising net costs.

However, following a period of low interest (and high deposit) the mortgage interest can rise once again, and as a result, a savings-based mortgage can become considerably more advantageous than a fixed-rate mortgage.

Do you need more information about your own particular situation? Contact Henk van Seijen, a partner at Finsens, providing specialist services to expats in the areas of tax, mortgages, pensions and investment advice.