You will carry the mortgage of your home with you for years to come. If you have extra money to put aside, you can pay off part of your debt in advance. And then you’ll get rid of it sooner, right? Unfortunately, it is not that simple, because there are many different factors that play a role in this. What are the advantages and disadvantages of accelerated repayment?
What is accelerated repayment?
If you take out a mortgage, the monthly amount depends on several factors. Consider the amount you borrow, the current interest rate, the duration of your fixed-rate period, plus the term and the type of mortgage (for example annuities, linear or interest-only). This results in a fixed amount that you pay every month to repay your mortgage plus interest. But perhaps you can set aside extra money to pay off the mortgage in advance, on top of the monthly costs you already have. Then we are talking about accelerated repayment.
How do you pay off more quickly?
You can set aside a large amount once a year for this accelerated repayment. You can also repay a small amount extra every month. Do you already know at the beginning of the year how much extra money you can spare per month? You can then schedule an automatic transfer to your mortgage provider every month. Ask your mortgage provider which account number you can use for the transfer.
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How much can you repay at an accelerated rate?
What you can put aside in an entire year depends on the exact rules and conditions of your mortgage provider. This is usually 10 to 20 percent of the original amount. If you initially have a mortgage of €200,000, you can repay an additional €20,000 to €40,000 every year. If you use an even higher amount for accelerated repayment, you may have to pay so-called penalty interest or other additional costs. There are mortgage providers who have more flexible rules, if you can pay the extra repayment with your own savings or other resources. Furthermore, keep a close eye on the term of your fixed-interest period, because your monthly costs may change.
What are the disadvantages of accelerated repayment?
So read up on the specific conditions of your mortgage provider. Be sure to check carefully which amounts you can repay without penalty. With accelerated repayment you pay off part of your debt, but does that outweigh the extra costs you incur? And will you have enough money left over to live on? Furthermore, keep in mind that you not only repay the mortgage itself, but also the interest. This may in turn be at the expense of your mortgage interest deduction, which will have a negative impact on your tax return.
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What are the advantages of accelerated repayment?
On the other hand, the extra repayment can be a good investment. If you can now repay part of your mortgage debt without penalty, your monthly costs can be reduced. And then you ‘earn’ this investment back at a later time. In addition, the smaller your remaining mortgage debt, the less risk the mortgage lender runs. This may therefore decide to place you in a lower rate class, which will reduce the risk premium in your mortgage interest rate. And then you can pay a lower interest rate. Finally, it is less likely that you will end up with a residual debt after selling your home, if the sale yields less than hoped.
Is it beneficial for you or not?
In short, if you plan to make additional repayments, there is a lot involved. Accelerated repayment can be advantageous or disadvantageous, depending on your outstanding mortgage debt, the rules of your mortgage provider and the level of your income. An extra repayment can be beneficial in the long term, but make sure you don’t get into trouble in the short term. So be well informed by an advisor or by someone you know who knows the business. Our colleagues at: What else you can do to save on your mortgage costs? Reporting point already explained.
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(Source: Archive, MAX Meldpunt, Libelle, Independer, Nationale Nederlanden, Rabobank, Hypotheekshop, Business Insider, Van Bruggen Advisory Group, De Hypotheker, Consumers’ Association, Vereniging Eigen Huis. Photo: Shutterstock)
