What is a linear mortgage?
A linear mortgage is a mortgage whereby you pay a fixed monthly amount. This amount is calculated by dividing the loan amount by the number of periodic repayments. At the end of the term, the entire mortgage has been repaid. Due to the monthly repayments, the residual debt and the monthly interest payments decrease over time. At the end of the term, the linear mortgage is therefore a cheap mortgage.
The advantages of a linear mortgage
A linear mortgage can be attractive for people who, for example, want to stop working earlier or want to retire early. It is also interesting for people with a risky profession where there is a risk that their income may be lower in the future due to unforeseen circumstances. Benefits include:
- The total interest expenses over the entire term of the mortgage are lower than with other types of repayment
- The rapid capital repayment from the start of the loan means rapid capital growth
- The risk decreases relatively quickly due to the relatively quick repayment.
The disadvantages of a linear mortgage
- With a linear mortgage, monthly payments are high in the first few years
- Due to the relatively high costs in the initial phase, you may be offered a lower mortgage than with other types of mortgage redemption
- Your level of mortgage interest relief is reduced during the term
- in the case of a linear mortgage, surplus value is created in the house because of repayments. As a result, the tax deduction for a possible relocation is limited (additional loan scheme).
The graph below shows clearly that although your monthly capital repayments remain constant, in the beginning you pay much more interest, while later in the term, when you have paid off more of the mortgage, the interest part reduces. This mans your overall monthly outgoings reduce.
Other factors to take into account
A linear mortgage may be the best option for you if you are in a position to pay substantial monthly payments now, and like the idea of needing to pay less in the future. Linear mortgages can be popular with banks, as more of the capital is paid off in the early stages, which means that their risk reduces more quickly than with other forms of mortgage.
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 a linear mortgage, and get some personal advice on whether this is the best mortgage option for your 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.