Are you thinking about paying extra money on your mortgage? You are not alone. More and more homeowners are wondering: is it smarter to (extra) pay off my mortgage with my money or to keep saving? Mortgage rates have risen in recent years, while savings rates are still limited. As a result, it can be attractive to use your savings for an extra repayment. What are the benefits of paying extra money on your mortgage and what are the risks?
Many mortgage lenders allow you to repay part of your mortgage without penalty each year. This is often a maximum of 10% of the original principal amount per calendar year. If you repay more, you usually pay a fee to the bank because they miss out on interest.
There are also mortgage lenders where you can repay your mortgage without any penalty. This is particularly interesting if, for example, you receive an inheritance or have extra savings available. That is why you should always check carefully what is possible with your mortgage provider.
An additional, penalty-free repayment on your mortgage has several advantages:
• Lower monthly payments
By paying off your mortgage, your outstanding debt decreases. That means: paying less interest and therefore lower monthly payments. For example, if you repay €10,000 at an interest rate of 5%, you will save €500 gross per year.
• Lower interest rates
A lower mortgage debt compared to your home value can put you in a lower risk class. A lower risk class often also includes a lower interest rate. This can give you a significant advantage. This does not apply to mortgages taken out with NHG, because the NHG rate is already the lowest interest rate you can get.
• Lower tax burden in box 3
You pay tax on your assets in box 3. By paying extra, you reduce your assets, which may result in less tax.
• Less chance of residual debt
With a lower mortgage debt, you reduce the chance of residual debt when selling your home. House prices are now high, but if this changes, you can benefit from your lower mortgage debt.
However, there are also disadvantages to take into account:
• Your savings are decreasing, so that your financial buffer is smaller and you are therefore less able to take financial blows;
• You may pay more tax in box 1 because you can deduct less mortgage interest;
• Your benefits, such as care or childcare allowance, may be lower;
• The loan scheme can have a greater effect when selling your home. This is because you must use your excess value when buying your next home to maintain your right to a mortgage interest deduction for that part;
• Do you have a bank savings mortgage, for example? Then extra repayments can actually be fiscally unfavorable.
Whether it's better for you to pay off your mortgage extra or keep saving depends on your personal situation. Extra repayments may be wise, but it affects several areas. Sometimes it is wiser to keep your savings as a buffer.
At Van Loon, we are happy to help you with this issue. Schedule an informal, personal consultation at our locations in Den Bosch, Leiden, Etten-Leur or one of our other eight locations. We can also schedule an online appointment if it suits you better.
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