Mortgage matters - Part 2

If you have decided to buy a house in the Netherlands, you are faced with the question of what will be the most appropriate type of mortgage. This of course depends on your tax position and whether you are likely to move again (any time soon).

In these paragraphs we provide a few recommendations as to which types are best suited to your specific tax status. In Mortgage matter - Part 1, we offered a brief explanation of the relevant types of mortgages available in the Netherlands.

Dutch tax issues for expatriates

In essence, a mortgage is a tax-driven product. Hence, to determine the most appropriate type of mortgage for you, it is necessary first to consider your tax status. In the Netherlands, the two major tax issues with which an expatriate is faced are the 30% ruling and the choice between resident and partial non-resident tax status.

› The 30% ruling

Simply put, the 30% ruling allows your employer to grant you a tax-free allowance of up to 30 percent of your total remuneration. Your total gross remuneration is thus reduced by 30% and in return you receive a 30 percent tax-free allowance. The result of the 30% ruling is a higher net salary. When applying for the 30% ruling, you may opt for resident or partial non-resident tax status, see below.

› Partial non-resident tax status

As a partial non-resident, you owe taxes on income derived from certain sources, while you are entitled to certain tax deductions, such as, for instance, the mortgage interest payments for your principal place of residence.

However, your net wealth (assets minus liabilities) is not subject to taxation. Hence, the ideal mortgage for a partial non-resident takes advantage of the fact that the interest payments on the mortgage are tax-deductible and that the investment income is not taxed. The corresponding mortgage is discussed further on.

› Resident tax status

As a resident taxpayer, you are taxed as any ordinary Dutch citizen and you are only entitled to mortgage interest relief on the principal place of residence.

Expatriates: What mortgages are appropriate?

The recommended mortgage depends on your special tax position and whether you are likely to move again.

The ordinary and the Special Endowment Mortgage are not appropriate for a number of reasons. This has to do with the likely duration of your stay. If you leave within, say, seven years and upon leaving decide to surrender the endowment policy, you may receive back only the total of premiums paid.

The reason why there will be hardly any investment return is that insurance companies write off all policy costs during the first years of the insurance. Hence, if you surrender within this write-off period, the investment return will only be marginal.

Most expats opt to pay off the mortgage amount (either through an annuity or linear mortgage), or to accrue the related amount on a savings account - on a special "Own Home Bank Savings Account," or SEW, see Mortgage matters - Part 1 - and sometimes they opt for an investment mortgage (investment account linked to a mortgage).

The redemption-free mortgage is also a reasonably popular option. Generally speaking, mortgages that are linked to insurances are no longer taken out, especially not by expats.

› You are a resident taxpayer

If you are benefiting from the 30% ruling, this will mean that you have a high net salary. This will enable you to make repayments. At the same time, income from wealth is tax-free. Instead, net wealth is taxed at 1,2 percent. For that reason, barring special circumstances, repaying the loan will usually not be tax-efficient.

› You are a partial non-resident taxpayer

In this case you need to find a mortgage that allows you to benefit from the tax-deductibility of the interest payments while at the same time allowing you to benefit from the tax-exempt investment income (since there is no "wealth / Box 3" tax for partial non-resident taxpayers).

A special type of mortgage can be found, allowing you to fully benefit from these advantages: a redemption-free mortgage combined with a compulsory savings scheme. Since there are no repayments, you benefit to the full from the tax-deductibility of the interest payments.

And since the investment income on the savings scheme is not taxed, you can use this to generate capital with which all or part of the mortgage can be repaid once your partial non-resident tax status ceases to apply. Because the savings are not taxed, it is better to save than to make repayments: the after-tax effect of the repayments will usually be lower than the tax-free effect of the savings.

It follows that it is advisable to borrow as much as possible provided that it can be demonstrated that the funds are used for the acquisition of the immovable property in the Netherlands. Finally, as partial non-resident taxpayers benefit from the 30% ruling; here too this allows you to make savings.

› US taxpayers

Special provisions apply to us taxpayers; these are not discussed here, but can be discussed with your tax advisor.

In fact, before reaching any decisions regarding this issue, be sure to consult a tax advisor, because there are many factors that could influence what could turn out to be the right choice for you. After all, this is a long-term commitment to a presumably not very cheap piece of property that will be your home for many years... Mortgage matters.
 

This is the second part of the "Mortgage Matters" article written by Stephanie Dijkstra, editor-in-chief of The XPat Journal. Have a look at the current issue or subscribe here.

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