Annuity mortgage vs linear mortgage: characteristics and differences

Linear mortgage features

• You repay a fixed amount. The amount of the mortgage loan (or mortgage principal) repaid is the same every month.
• As the debt decreases with each repayment, the interest you pay also decreases. As a result, your gross and net monthly costs are different each month.
• Your monthly expenses are higher at the beginning, but they decrease during the term of the mortgage.
• You pay more interest in the beginning. As a result, the mortgage interest deductions (hypotheekrenteaftrek) are also higher in the beginning.
• A linear mortgage is ultimately more advantageous than an annuity mortgage, but you don't benefit from that until about 15 years later. This is why most first-time home buyers choose an annuity mortgage instead of a linear mortgage.

Annuity mortgage features

• Annuity means fixed. You pay the same fixed gross amount every month during the fixed-interest period. The amount you pay comprises repayment of the loan and the interest on the loan.
• The loan repayment/interest ratio of the monthly payment changes during the mortgage term. At first, you pay a lot of interest and repay only a little of the loan. Later, this is the other way around.
• Because you pay more interest in the beginning, the benefit from the mortgage interest deduction is highest then.
• You gradually decrease the debt and thus pay less interest. And at the end, you will pay more in loan repayment than in interest. As a result, there is less benefit from the mortgage interest deduction and your net monthly burden increases.
• First-time buyers most often choose annuity mortgages. This is mainly because of the relatively low monthly costs in the beginning.

Similarities between annuities and linear mortgages

• Mortgage interest deductions (hypotheekrenteaftrek) are possible with both types of mortgages. So you can deduct the interest you pay each month from your taxable income, which decreases your income tax.
• Both types have the most benefit from the mortgage interest deduction at the beginning and this benefit decreases over the mortgage term. This is because with both mortgages you pay a lot of interest in the beginning.
• You have the security that the mortgage will be paid off in full at the end of the term.

Differences between annuity and linear mortgage