Many homeowners want to keep their interest-only mortgage. What are their main objections to repayment and are they justified?
Retain interest-only mortgage
The call from the Netherlands Authority for the Financial Markets (AFM) to start repaying seems to be on deaf ears. Most homeowners with an interest-only mortgage want to keep it. Mortgage Interest Rates examined the most important objections to repayment. These are not always justified.
Penalty interest most important threshold for repayment
Respondents quote the penalty interest (27%) most often as a reason for not paying off. This is striking because the scope for repayment-free is nowadays ample:
- Per year, 10% to 20% of the mortgage amount (depending on the lender) can be repaid without penalty.
- Converting the mortgage from repayment-free to annuity or linear repayment is penalty-free. Provided the mortgage is continued with the same bank for the remaining fixed-rate period.
Do you prefer not to invest in a mortgage?
To be able to pay off, there must be of course be capital. Of the respondents, 12% indicate that his or her capital or capital growth is too limited to redeem.
Having assets does not always mean that this is used for the mortgage. 24% of respondents indicate that they want to dispose of assets freely and therefore cannot redeem.
This is a wise choice if a major purchase is planned within 3 to 5 years. In other cases, the assets are often asleep in the bank account. Due to a combination of low interest rate savings, inflation and possible return levy, it is itself worth less every year. Repaying will reduce the mortgage interest and the monthly payment over time. This is guaranteed return.
Repayment-free mortgage a risk?
The highest risk of a permanently high mortgage is noticeable until well into the future and hopefully never. Of the respondents, 20% said they did not consider their mortgage as a risk. The risk is indeed limited for some of these respondents, for example if the mortgage is partially repayable.
Homeowners with a fully interest-only (top) mortgage, however, do run a risk. A fall in income (including after retirement) or a higher monthly payment (after interest rate rise or lapsed interest deduction) can lead to payment problems for these households.
Advice on interest-only mortgage
The objections from homeowners to repay the interest-only mortgage are therefore not always justified. The AFM therefore has a point in stating that better information is needed. In its information, however, the regulator focuses exclusively on the risks.
The survey shows that homeowners are in need of a broader mortgage advice. In addition to the risks, attention must also be paid to the monthly payment, financial benefit (or disadvantage) and asset advice. However, such advice depends on a price tag.
If banks want homeowners to pay off their interest-only mortgage, they could offer this advice to their customers for free or at a discount.