Annuity mortgage: what is it?

Is an annuity mortgage suitable for me?

Do you want to use the hypotheekrenteaftrek (mortgage interest deduction)? This is only possible with an annuity or linear mortgage. An annuity mortgage is suitable if you expect that your income will increase in the future. This is because you pay the same amount each month over the mortgage term, but a lot of interest at the beginning and less debt repayment. The interest you pay is tax deductible. So this gives you a big tax advantage. Over time, the amount you repay gradually increases while the amount of interest paid decreases. Your tax benefit then also decreases over time, resulting in increasing net monthly expenses. 

Example repayment of an annuity mortgage

An agreement is made with the bank about the interest rate. For example, a €225 000 mortgage is signed for a term of 30 years. The interest rate agreed upon is 4%. What do the repayments look like? How much interest do you pay with an annuity mortgage?

Additional repayment with or without penalty

Advantages and disadvantages of an annuity mortgage

Advantages

• You have the most tax advantage in the beginning of the term and thus lower net monthly expenses
• You have the security that your loan will be completely repaid at the end of the term
• You gradually pay less interest
• Your gross monthly expenses remain the same for the mortgage term

Disadvantages

• The tax advantage decreases over time
• Your net monthly expenses gradually increase

Annuity mortgage vs linear mortgage

The main advantage of an annuity mortgage is that your monthly expenses are lower at the beginning of the term. Unfortunately, your net monthly expenses will increase each month because the tax benefit decreases. With a linear mortgage you repay a consistent amount of the loan, and your net monthly expenses gradually decrease. 

The disadvantage of a linear mortgage is that you start repaying the loan immediately. So the monthly expenses are highest at the beginning of the term. This is why most people choose an annuity mortgage instead of a linear mortgage. Want to know more about the difference between an annuity vs linear mortgage? See our overview here.