What is an annuity mortgage?
An annuity mortgage (or repayment mortgage) is a mortgage whereby you pay a fixed monthly amount made up of interest and capital repayment. That interest and repayment together are called the annuity. The monthly amount remains the same throughout the term of the mortgage, which is normally taken out for between 20 and 30 years.
The advantages of an annuity mortgage
An annuity mortgage is one of the two most common types of mortgages in the Netherlands. The other type is the linear mortgage. The main advantage is that with an annuity mortgage, as with a linear mortgage, you will have repaid your whole mortgage at the end of the term. You also don’t have to take out insurance to save for the repayment. Other advantages include:
- Your monthly repayments remain the same throughout the life of the mortgage, making it easy to budget
- You are building up safe capital through repayments
- You have low net expenses in the beginning due to little capital repayment
- Your risk of an interest rate increase will be lower after half of the term because your loan will be lower.
The disadvantages of an annuity mortgage
The main drawback of an annuity mortgage is that you don’t make full use of the mortgage interest deduction. This is the way it works: With an annuity mortgage, your monthly repayments include payment of the mortgage and interest. In the beginning you pay a relatively high interest rate, because there is still a big debt. As the time goes by, the repayment part of the payments becomes larger and the interest rate smaller. Repayment of the debt is therefore taking place faster and faster. But because you pay less and less interest, your mortgage interest deduction will also become smaller and smaller. This is because capital repayments may not be deducted from tax, but mortgage interest paid may.
The graph below shows clearly that although your monthly repayments remain constant, in the beginning of the term they are made up of virtually all interest and only a small amount of capital repayment, while later in the term, the interest part reduces, and you start paying off more of your capital.
Other factors to take into account
If you are taking out a mortgage later in life, an annuity mortgage may not be the best option for you, if you think you may struggle to keep up the monthly repayments, either because you want to start working part-time or if one of you will stop working altogether.
In that case, a linear mortgage may be a better option, as the monthly repayments in that type of mortgage reduce over time. Initially, your monthly outgoings may be higher, but you will know that you are repaying more of your capital in the early stages too.
Of course, choosing a mortgage is not only down to the type and the rate you are being offered. You also should look carefully at other conditions, such as how much you are allowed to pay off without penalty (handy if you get a bonus or sudden windfall and want to pay off some of your mortgage), fees payable when taking out your mortgage, possible penalties in case you want to pay off your mortgage early, and additional costs like insurance that your mortgage provider may ask you to take out.
Would you like more information on an annuity mortgage, and to find out whether this is the best mortgage option for your personal circumstances? FVB de Boer specialises in mortgages, pensions and other financial matters for expats and know the hurdles and difficulties expats can encounter when trying to make financial commitments abroad. Call or email us for some independent advice.