Annuity vs Linear Mortgage: Which is The Best - Expat Estates (2024)

Introduction

For expats eyeing the Dutch property market, after understanding how much mortgage you can secure, a critical decision awaits: selecting the right type of mortgage. With a plethora of choices available, the two most prevalent options are the Annuity and Linear mortgages. These are often the go-to choices for many, overshadowing other mortgage types such as the Interest Only, Saving, Investment, and more. While this article primarily zeroes in on the intricacies of Annuity and Linear mortgages, it’s essential not to overlook the Interest Only mortgage. This particular type can be especially enticing for certain individuals, offering unique benefits. Dive into this comprehensive guide of Annuity vs Linear Mortgage, and by the end, you’ll have a well-rounded understanding. This knowledge will empower you to make a decision that suits your needs in the Netherlands’ dynamic housing landscape.

Understanding Annuity Mortgage

The Annuity Mortgage, or “Annuïteitenhypotheek” as it’s locally termed, stands out with its unique monthly payment structure. Here, your monthly payment constitutes a blend of mortgage interest and a repayment portion. Initially, you’ll notice that a more substantial chunk of your payment goes towards the interest, leaving a smaller portion for the actual loan repayment. But here’s the twist: as you move deeper into the loan’s lifespan, this balance gradually shifts. By the end of your mortgage term, you’ll direct the bulk of your monthly payment towards repayment, which will make the net monthly payments slightly higher.

Key Features

• Monthly Payments: A blend of mortgage interest and repayment, fixed total amount per month.
• Initial Phase: Larger portion dedicated to interest, smaller to loan repayment.
• Progression: As you delve deeper into the loan’s term, this ratio reverses.
• End Phase: Larger portion dedicated to loan repayment, smaller to interest.

Stylized Example

• Mortgage Amount: €400,000
• Duration: 30 years
• Interest Rate: 4.35%
• Monthly Payment: Approximately €1,971.42
• Unique Selling Point: This monthly amount is fixed over the mortgage’s lifespan.

This structure offers predictability in the early stages of the loan, making it easier for individuals, especially expats, to manage their finances while they adjust to their new environment in the Netherlands.

It’s also worth noting that the interest you’re paying is calculated on the remaining mortgage amount. Since you’re making monthly repayments, this outstanding amount reduces over time. As a result, the interest portion of your monthly payments sees a gradual decrease throughout the mortgage term.

Understanding Linear Mortgage

The Linear Mortgage, known in Dutch as “Lineaire Hypotheek”, stands as a straightforward and transparent mortgage option that offers consistent repayment, combined with decreasing interest over its lifespan. Designed for clarity and predictability, it’s a structure where the principal repayment remains constant throughout, while the interest component reduces as the outstanding loan decreases.

Key Features

• Monthly Payments: A combination of consistent mortgage repayment and variable interest.
• Initial Phase: Higher monthly expenses due to a larger interest component.
• Repayment Structure: A fixed amount is repaid on priciple monthly, ensuring a steady reduction of the principal loan.
• Interest Dynamics: As the outstanding loan diminishes with each repayment, the interest component of the monthly payment also decreases.
• End Phase: Monthly expenses decrease as the loan gets closer to end term.

Stylized Example

• Mortgage Amount: €400,000
• Duration: 30 years
• Interest Rate: 4.35%
• Monthly Payment: Approximately € 2557 (Interest € 1446 and pricipal € 1112) at start, and approximately € 1112 (Interest € 0 and pricipal € 1112) by the end of 30 years
• Unique Selling Point: Decreasing burden over time

At the heart of the Linear Mortgage is its uncomplicated structure. The monthly repayment towards the principal remains static, offering clarity on the amount to set aside each month for the mortgage. However, the interest component starts off higher and sees a gradual reduction as the principal loan amount decreases. This ensures that, over time, the total monthly payment becomes less.

Expatriates seeking a mortgage plan where they can visually track their loan reduction might find the Linear Mortgage appealing. Its transparent structure and predictable repayment path make it easier for homeowners to plan their finances. If you prefer to front-load expenses or expect your income to decrease in the future, this mortgage type might fit you best.

Interest Only Mortgage – An Alternative of Annuity vs Linear Mortgage:

Annuity vs Linear mortgages often dominate home financing discussions in the Netherlands. However, the Interest Only Mortgage is another option that has attracted a lot of interest. As the name suggests, homeowners with this mortgage only pay the interest on the loan during its term, without any mandatory repayment of the principal amount.

Key Features:

• Payment Structure: Only the interest on the loan amount is paid during its term.
• Repayment: The principal loan amount remains unchanged and is typically due at the end of the mortgage term.
• Mortgage Interest Deductions: Its popularity has dwindled since 2013, given changes that restrict mortgage interest deductions for new Interest Only Mortgages.
• Loan Limit: Typically, banks allow financing up to 50% of the property value through an Interest Only Mortgage, making it essential to have another form of financing for the remainder.
• Complementary Mortgage: Many banks offer the Interest Only Mortgage in combination with another mortgage type that involves repayment.

Stylized Example:

• Mortgage Amount: €400,000
• Duration: 30 years
• Interest Rate: 4.35%
• Monthly Payment: Approximately € 1446
• Unique Selling Point: Lower monthly payment. However, you’ll need a lump sum repayment or an alternative financing method at the end of the 30 years.

For those who anticipate a significant influx of funds in the future or are looking for lower initial monthly payments, the Interest Only Mortgage might seem appealing. However, its decreasing popularity and the 2013 policy changes make it less advantageous than before. It’s also worth noting that at the end of its term, a lump sum repayment or an alternative financing method will be needed to cover the principal amount. As such, while it offers flexibility, it also carries risks that expats should be acutely aware of.

Mortgage Interest Deduction Annuity vs Linear Mortgage (and Interest Only Mortgages)

Hypotheekrenteaftrek is a tax deduction available to homeowners with a mortgage in the Netherlands. When you take a mortgage, it’s essentially a loan from the lender with your house as collateral. You pay interest on this loan, known as mortgage interest. To promote homeownership, you can deduct this interest from taxes under specific conditions, known as the mortgage interest deduction.

How does it work?

The principle is clear. You can deduct the interest you pay on your mortgage from your gross income. This reduces your income tax. The deduction lasts for 30 years.

For mortgages started after 2012, there’s a catch. Only annuity and linear mortgages qualify for this deduction. Also, you must pay off the mortgage within 30 years. Planning to borrow more later? That added amount gets its own 30-year deduction. Remember, mortgages from before January 1, 2013, have different, more flexible rules.

Interest Deduction for Interest Only vs Annuity vs Linear Mortgage:

• Annuity & Linear Mortgages: For those who have taken out an annuity or linear mortgage before or after January 1, 2013, they can claim mortgage interest deduction provided the mortgage is paid off within 30 year.
• Interest-Only Mortgages: For those who never had an interest-only mortgage before January 1, 2013, it’s still possible to get one, but it falls under the ‘Box III’ taxation category. The misconception is that interest-only mortgages were only for pre-2013 homeowners. In reality, it’s about tax deductibility. If you had an interest-only mortgage before 2013, its interest is deductible. For new borrowers post-2013, interest-only mortgages are not tax-deductible.

Deduction Rate Evolution

Since 2014, the deduction for the highest income bracket has been reduced by 0.5% annually. From 2020, this was accelerated to 3% annually. By 2023, the deduction rate will be aligned with the rate for the lowest income bracket, set at 36.93%. Although the deduction hasn’t been entirely phased out, limitations have been imposed, especially for those in the highest income bracket.

Comparing Interest Only vs Annuity vs Linear Mortgage:

For expatriates in the Netherlands, understanding the nuances of the available mortgage types is crucial. Here’s a concise comparison of the Annuity, Linear, and Interest Only mortgages to guide your decision.

Similarities Interest Only vs Annuity vs Linear Mortgage:

• Mortgage Interest Deductions: Both Annuity and Linear mortgage (and Interest Only before January 1, 2013) allow for these deductions, presenting a tax advantage.
• High Initial Interest: The beginning stages of Annuity and Linear mortgages primarily involve high interest, offering early mortgage interest deductions.

Differences Interest Only vs Annuity vs Linear Mortgage:

• Annuity Mortgage:
  • Payments: Combined mortgage interest and repayment. The interest portion diminishes over time, while repayment grows.
  • Suitability: Best for those expecting a rising income due to balanced initial costs that increase gradually.
• Linear Mortgage:
  • Payments: A fixed repayment amount every month, with interest costs declining as the principal reduces.
  • Suitability: Favored by those anticipating a future income decrease or preferring higher initial payments that wane over time.
• Interest Only Mortgage:
  • Payments: Only the interest is paid during the mortgage term, with the principal usually repaid through another mortgage type or savings.
  • Popularity: Its appeal has reduced since 2013 due to alterations in mortgage interest deductions.
  • Suitability: Previously popular for its low monthly costs, it’s now typically combined with other mortgage types.

Final Thoughts

Choosing the right mortgage in the Netherlands—be it Annuity, Linear, or Interest Only—shapes an expat’s financial journey. Annuity Mortgages offer low initial payments, suiting newcomers adapting to a new life. Linear Mortgages attract those who want higher upfront payments that decrease over time. While Interest Only Mortgages have seen less traction since 2013, they remain a viable option in specific scenarios. The key lies in understanding personal financial goals and future income paths. While this guide offers insights, each expat’s situation differs. It’s crucial to consult a mortgage advisor for tailored advice. The right decision ensures financial comfort throughout your stay in the Netherlands.