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05/08/2003Re-mortgaging explained

Are you paying more than you should for your Dutch mortgage? Our experts look at your options.

 
If you took out a mortgage more than five years ago, the probability is that at least part of it is in the form of a spaarhypotheek, the Dutch equivalent of a British endowment mortgage. In other words you would have (part of) your mortgage tied to a savings plan which — over the term of the plan — is designed to repay your mortgage with tax-free money. The traditional savings element of such mortgages used a "guaranteed" interest rate, which is the same as your mortgage rate. Thus, the premium you paid would have been back calculated from the gross amount that had to be available at the end of the term. Thus, if you had a mortgage rate of 7 percent and a mortgage term of 30 years you would typically be paying a premium of EUR 150 per month to reach your target of EUR 136,134 at the end of the term. Nowadays there are what is known as "Universal Life" plans (yes the Dutch use the English expression) which typically produce growth of 8 percent or more. They are the equivalent of the British or US "Unit Linked" plans. EUR 150 per month into one of these plans would produce EUR 222,806 at the end of the 30-year term. However, the rules have changed with regards to these plans. Anything over and above the mortgage sum becomes subject to asset tax at 1.2 percent of the value per annum.  For the same money — you would have a taxable (at low rates) lump sum of EUR 86,672 over and above the amount required to redeem your mortgage. Alternatively, you could reduce your monthly costs to achieve the same goal and have no tax consequences. The other difficulty with this type of mortgage is that the savings plan is rarely transferable from one lender to another. Mortgages are never transferable from one property to another. When you sell one house to buy another, you must first redeem the old mortgage, after which you can take out a new mortgage. But if you wish to link your current savings plan to your new mortgage then — usually — you have no choice but to go back to the original lender. You therefore have no opportunity to shop around for a better deal elsewhere.   In any case, if your current mortgage is more than five years old you are almost certainly paying more than necessary. Currently, interest rates are anything from 4.1 percent to 5.8 percent depending on the type of mortgage you have and who you are borrowing from. Another reason for re-mortgaging is — of course — to release equity, which may be used either to make improvements to your home or for other purposes. But the interest on the additional mortgage raised is only tax-deductible if it is used for home improvement. The costs of re-mortgaging A full valuation of the property — up to 0.2 percent of the value plus BTW. Notary (notaris) costs for preparing the mortgage contract (hypotheekakte) — 0.15 percent plus BTW (tax deductible in the year it is realised). Cost levied by the mortgage company (afsluitprovisie) — 1 percent of the mortgage (tax deductible in the year it is realised). (Possibly) a penalty to the old mortgage lender which is the difference between the interest rate you are paying and the same lender's current interest rate for the same fixed term multiplied by the number of years remaining on the fixed term. Example Your current mortgage has an interest rate of 6.6% fixed for 10 years. You took out the mortgage 7 years ago so you now have 3 years left on the term. Current interest rate (10 years fixed) is 6.6% and your current mortgage is EUR 300,000. Your penalty is, therefore, 300,000 x 1 percent x 3 = EUR 9,000. This is tax deductible in the year that it is realised. In short the net cost to you is around EUR 5,000 depending on your marginal tax rate. However If your original mortgage was 50 percent aflossingvrij and 50 percent spaar(leven) then your current gross annual payments will be EUR 22,128 and net (after tax relief) EUR 14,604. If you now take a beleggershypotheek your gross payments would be EUR 18,000 and your net would be EUR 10,944 a saving of EUR 3,660 per annum. In short it takes about 18 months to earn back the costs of re-mortgaging through the reduced monthly outlay. This column is part of a series of articles about mortgages by Strategies. It is for informative purposes only, is general in nature, and is not intended to be a substitute for competent legal and professional advice. 5 August 2003 Subject: Re-mortgaging


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