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Taxes, not the most favorite word in the dictionary for most people. Tax breaks or deductibles, however, are a great thing to have and owning (or buying) a home will give you access to a few exclusive for homeowners. Let’s have a look at what they are, and how much it can save you.
“You must pay taxes. But there’s no law that says you gotta leave a tip.”
– Morgan Stanley advertisement
Mortgage basics
This article is part of a series on the basic variables important in a mortgage:
- Loan amount
- Loan term
- Mortgage types
- Fixing the interest rates
- Tax benefits
- Mortgage insurance
- Other obligations (loans, alimony)
I will of course attempt to include as many different financial philosophies along the way, although this is a topic where I cannot avoid regional specificity when it concerns rules and regulations that apply to various parts of this discussion.
Tax benefits
Let’s talk about those tax benefits that mortgages can create. In the Netherlands, the main benefit is one referred to as a mortgage interest deductible (‘hypotheekrenteaftrek’ in Dutch) similarly as in the U.S. where you can deduct mortgage interest from your taxable income, effectively reducing your net mortgage costs. However, there are a few smaller items worth mentioning.
What can I deduct?
There are a few costs that can be deducted only once, including:
- Valuation fees.
- Mortgage advice fees.
- Mortgage handling fees.
- Application fees for the mortgage insurance.
- Notary fees for the mortgage deed.
- Early repayment fee (previously known as penalty interest).
And then there are the costs you are allowed to deduct every year, including:
- Payments for a land lease, building or planting rights or a perpetual hereditary lease.
- Maintenance costs for a listed building.
- The mortgage interest deductible (see below).
When can I get the mortgage interest deductible?
There are a few conditions that need to be met (in the Netherlands) in order to be eligible for this deduction of your interest though, including:
- The mortgage is (fully) used to buy, improve or maintain your home (not a commercial property – and not using a part of the loan for something like a car).
- The home is your main place of residence (not a holiday – or second home).
- You will repay the mortgage within 30 years and is a level-payment – or straight-line mortgage (for mortgages started in 2013 or after).
- After selling a home, when you have surplus value and you buy a new home within three years, you can only use the deduction if the surplus is used for the new home.
If you have yet to get a Dutch mortgage – and you want tax benefits – you are stuck to choose an amortized mortgage, either the straight-line or the level-payment mortgage. Although with the decreasing mortgage rates, there is a new influx of people choosing for a non-amortized mortgage type, as the tax benefit no longer outweighs the decreased monthly costs. I am no financial advisor, but for those on the path to (early) financial freedom it should be mathematically clear that never getting rid of your mortgage will not get you there, as the debt will never be cleared until the end of your term – if you’re not unlucky.
If you already had a mortgage before 2013, the deduction can still only be applied to a maximum of 30 years, with mortgages starting before January 1st 2010 having a deadline of 31st of December 2039. After these 30 years you can no longer deduct any interest, increasing the effective costs of your mortgage.
Mortgage interest deduction amount
How much you can deduct depends on your income. The more you earn, the more you can deduct. However, starting 2019 the Dutch government is increasing the gradual reduction of the maximum mortgage interest deduction, which is especially noticeable if you pay tax at a higher rate (thus have a higher taxable income) – in 2020 there are two income tax brackets, incomes that stay in the lowest bracket will not feel this change.
The table below shows the maximum deduction one can make on the mortgage interest – with the target in 2023 set to 37.05%. Using 2020 as an example, if you’ve paid 7,500 in interest, you can get a deduction of 49% or 3,675.
Before you can deduct mortgage interest, part of your home’s value will be added to the taxable income also known as imputed income from homeownership (‘eigenwoningforfait’ in Dutch) and amounts to a percentage of your home’s value for the purposes of the Dutch Valuation of Immovable Property Act (‘WOZ-waarde’ in Dutch). This imputed income is reducing concurrent with the maximum deductible to compensate, however with soaring housing prices this effect will probably be minimal.
To make matters more complicated, there is the Hillen Law (‘Wet Hillen’ in Dutch). This law was introduced in 2005 to stimulate people to pay off their mortgage by forfeiting the imputed income when it is greater than your mortgage interest deductible. However, with the laws mandating a mortgage to be paid off in 30 years starting 2013, this ‘tax benefit for the rich’ became obsolete. This caused the benefit to be gradually reduced in 30 year starting January 1st 2019. Every year, people who have paid off (most of) their mortgage will therefore start to pay more and more taxes.
Something to think about when paying off your mortgage early.
