Dutch mortgage interest-only

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il-besa
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Post by il-besa »

Hi folks,

exactly 1 year ago I bought my apartment, with a mortgage that is still not convincing me.
Here in Netherlands is popular to have "interest only" mortgages, where you only pay the interest over the loan, without paying back the capital.
Advantage: there's a tax relief over the interest you pay, so the more interest you pay the more the government will give you back... just to put some numbers, if you have a 1600e/month mortgage and a good salary, you'll get ~600e/month back.
Disadvantage: after 30 years of paying interests, the house is still of the bank.

But yes, because of inflation the capital will look like peanuts and the value of the house will be fantastic.
I don't see myself staying in this apartment and paying this mortgage for 30 years, so I can always sell and find another solution as the market is quite good where I live.
What do you guys think of this kind of mortgage?

Is it common in other countries too?
Thanks

D


jacob
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Post by jacob »

It is common in Switzerland. As a result, house prices are astronomical. Effectively, it means that the banks are landlords---you're renting the house from the bank---without the bank having the responsibility of maintenance or the risk of depreciation.
It's the worst of all worlds in my opinion.


ktn
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Post by ktn »

@jacob: neither does the bank have the benefit of appreciation.
We don't have such mortgages in Finland. In any case, I would want to have the house paid off and not be obliged to some bank. The principle of "the more interest you pay the more the government will give you back" is a bad one imho.


AlexOliver
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Post by AlexOliver »

So you never pay the capital? Is there an option for prepayment? If so how does that work?


il-besa
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Post by il-besa »

Well the "interest-only" is just one of the options.

You can still go for a repayment mortgage and give back the capital, but the monthly rate would be higher as the tax relief is much less.
So the question is: better to pay more and own the house after 30 years, or better to save more and rent? (with appreciation/depreciation possibilities)
Jacob explain it perfectly, it's like renting from a bank, instead of a private, for ~40% less.
Basically this allowed me to live in an apartment I could not have bought otherwise, but I wasn't yet frugal at that time :D


Sven
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Post by Sven »

With my mortgage i had a one year interest-only at the beginning of it to make an 'easy start', but now i think it was one of the worst financial decisions of my life! ;-) I would now rather send that additional paid interest to something that would 'produce' something (like a more efficient heating system or the like) than just send it down the interest drain! :-s
The good thing i see in this pay-interest-only mortgage is if you would use it to buy a property to rent out! As you mentioned, your cost is 40% less compared to the rent you should be able to receive. You should be able to set aside quite a nice part of that income too! Down the road you can sell the property for the same price (if you are lucky ;-)) or for even a higher price (a reason to be even happier :-)). Or I am missing something?


il-besa
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Post by il-besa »

Hi Sven,

yes you're right!

The money you save today paying only the interest are set aside.
So, I think that if you can have a return of investment on those money higher than the mortgage rate, you're better off.


Idleswine
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Post by Idleswine »

@il-besa - that reminds me of endowment mortgages which used to be popular in the UK, where you would pay the interest, but rather than pay the capital off, you would pay into a fund - which of course would be worth more than the capital at the time of maturity.
Except it didn't always work out that way as many of the funds performed badly. I think you have to be careful taking gambles on paying back the capital.


ktn
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Post by ktn »

@il-besa: I am surprised you agree with Sven's idea of 'renting' such a property for purposes of renting out, as I thought it was pretty clear that subsidized interest in the Netherlands only applies to owner-occupied first homes: http://www.belastingdienst.nl/variabel/ ... rs-12.html
Isn't it true that, as of 2001, the period during which the homeowner could profit from the tax-deduction was capped at 30 years and a second home mortgage was excluded? Wouldn't that rule out buying a property for purposes of renting?
You also have the concept of Notional Rental Value to complicates things: http://www.belastingdienst.nl/variabel/ ... rs-10.html
And from what I hear, you seem to have quite a lot of subsidized rental housing already available and the whole idea of interest-deductibility is being questioned: http://www.investoralist.com/partys-ove ... t-back-now

http://www.nrc.nl/international/electio ... tax_relief
My turn to ask, am I missing something?


il-besa
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Post by il-besa »

@ktn,

you're well documented about Dutch laws, how come? :)
I agree with Sven with the concept that this would be better for an house to rent out, and that the money saved can be invested, but you're right that it's not legal in the Netherlands.
The tax relief is only for the house you live in.
I know every now and then they discuss about stopping with the tax relief, but I can't imagine the effect of such a change on the economy.... especially because, even if you can't rent out an apartment with a mortgage on it (unless the bank approves it) it's a common practice...
Ciao

D


ktn
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Post by ktn »

@il-besa: Investing in income-producing rentals is an area of interest. And when you mentioned this, I couldn't resist checking it out. Thanks to the internet, this is a fairly easy task. Besides, I have kinda liked all things Dutch for a long time. :-)
If you are planning to do this yourself, you may want to check it's impact on your '30% facility' status. I read somewhere that it does make a difference.


il-besa
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Post by il-besa »

Hi guys,

another question on this old subject :)
I found out that I have option to reduce the total loan of my interest-only mortgage up to 10%/year, with a proportional reduction of my monthly rate.
This means that I can "invest" part of my savings to reduce the loan and pay less per month, that I see as a ROI.
According to my calculations, for any X capital, the ROI (that is the money I actually save not paying the interests) is 3.25%.
To me this seems a pretty safe way to get a 3.25% out of an investment, rather than 2.2% in a saving account, but as I'm still moving my first steps in PF (and reading Jacob's book) I'd like to know your view... :)
Thanks!

D


ktn
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Post by ktn »

How easily can you sell the apartment during the 10 years it will take you to pay it off fully? Who gets to keep the appreciation/depreciation in price that may happen over the years you occupy it? You or the bank or both?


il-besa
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Post by il-besa »

Hi Ktn,

I think I can sell the apartment at anytime independently by the fact that I have a 100% loan or less.

The appreciation/depreciation is on me, I just reduce the amount of money I'm borrowing from the bank and hence paying less interests per month.
Hope is clear

D


il-besa
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Post by il-besa »

Basically, in my mind the rule is:
IF (investment ROI > mortgage interest) THEN keep investing the capital

IF (mortgage interest > investment ROI) THEN put the capital to reduce the mortgage
It's simple as this, unless something I'm not taking into consideration (compound interests maybe?) is shifting the decision :)
ciao

D


George the original one
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Post by George the original one »

Unless the investment returns are very predictable or guaranteed, then you need to factor in a margin of safety on your ROI. An unexpected negative return can wipe out several years of positive returns.
Paying off the mortgage is also not taxed, whereas investment returns are likely taxed.
***

Note that I'm not saying "don't do this", just making sure you're planning all the angles.
I've got my own variation on this mortgage theme, which is the American fixed/variable mortgage, but mine is a low fixed rate (3.85%) for 10 years before it becomes variable and I expect to accumulate enough to pay the full mortgage well ahead of the 10 year mark.


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