Mortgage interest deduction in 2024
If you’re a homeowner, you can sometimes claim a mortgage interest deduction on your annual income tax return. While this can lower your overall income tax bill, the exact amount you can save depends on several factors. What are the rules in 2024? How is income from your main residence taxed? And when can you save by making extra repayments? We’ve listed some of the things you should know.
What is mortgage interest deduction?
The interest you pay on your mortgage for your main residence is tax-deductible on your annual income tax return (box 1). This tax rebate means your mortgage repayments will be lower overall. However, you can only claim the deduction under certain circumstances (website Belastingdienst.nl, in Dutch).
Mortgage interest deduction also covers more than just the interest: it’s a catch-all term for the tax-deductible expenses you incur in relation to your home (your main residence). This includes the purchase costs as well as any renovation or maintenance costs, valuation costs, completion costs or ground lease.
Box 1: income from your main residence and the 'Hillen law'
Your main residence is subject to income tax like your income from work. Each year, you must add a specific percentage of your home’s ‘WOZ-waarde’ (the annual valuation of your home by your local municipality) to your annual taxable income. This is known as the ‘eigenwoningforfait’, or the extra tax on taxable income from your main residence. In 2024, the ‘eigenwoningforfait’ was 0.35% for homes valued at €1,310,000 and below. If your home is valued above that threshold, the excess amount is subject to the 2.35% ‘villa tax’.
You may be able to save if the tax-deductible mortgage interest is higher than the extra taxable income from your main residence. If the tax-deductible mortgage interest is less than the tax you owe on income from your main residence, your ‘income from your own home’ will be positive on balance. According to the ‘Hillen law’ (website Belastingdienst.nl, in Dutch), you may then deduct an additional amount from this income. However, the scope of this extra deduction has been steadily decreasing since 2019. It amounted to 80% in 2024, with the remaining 20% subject to tax on income from work and home ownership (box 1).
Declaring your main residence in box 1 or box 3
Your mortgage is usually classified as income from work and home ownership (box 1), since a debt is linked to the property financed by that debt. If you take out a loan to purchase a home, this debt comes under box 1 minus the interest you pay on the debt. However, mortgage debt may come under box 3 (income from savings and investments) in specific circumstances. This can actually save you more money in some situations. For instance, if you have sufficient wealth in box 3 under ‘investments and other assets’ and the amount of tax-deductible mortgage interest is lower than the extra taxable income from your main residence (the ‘eigenwoningforfait’). This article explains various scenarios.
Decrease of mortgage interest deduction for highest tax band
A decrease of the mortgage interest deduction for the highest tax band started in 2014, bringing it in line with the standard tax band. In 2024, the deduction was capped at 36.97%. As a result, if your 2024 income from work and home ownership (website Belastingdienst.nl, in Dutch) is over €75,518, the percentage of expenses you can deduct will be lower than in previous years. This applies to all deductible expenses for your own home, such as renovation costs, ground lease and notary fees.
If your income plus the extra taxable income from your main residence comes under the highest tax band in box 1 (work and home ownership), you pay the 49.5% income tax rate.
Reasons to make extra repayments on your mortgage
Each year, you may make additional repayments on a percentage of your overall mortgage without incurring an early repayment fee. Every lender applies a different percentage, but the going rate is 10% to 20% of your original mortgage debt. Any repayments you make above that threshold might be subject to an early repayment fee (also known as ‘penalty interest’). It’s worth noting that this rule applies only to fixed-rate mortgages. If you have a variable-rate mortgage, you’re free to repay as much as you want each year.
There are several reasons to make extra repayments on your mortgage. You’ll decrease your overall mortgage debt, lower your monthly payments (and the interest you pay) and protect yourself from negative equity. If you repay enough, you might come under a lower rate category and risk surcharge category (determined by the ratio of your mortgage debt to the value of your home). This means your mortgage rate will decrease.
When to make extra repayments on your mortgage
Whether you can increase your net worth by making extra repayments on your mortgage depends on the net return from your wealth in box 3 (savings, investments and similar). Extra repayments can be cost-effective if the return on your wealth after tax is lower than the net cost of your mortgage. If you’re unsure whether you can save by repaying all or part of your mortgage, have a read of our article ‘Managing financial windfalls: should you pay off your debt?’.
And remember: when you make your repayments can make a difference. The tax on your income from savings and investments (box 3) is calculated according to the value of your wealth on 1 January of the tax year in question. This is known as the ‘reference date’. Repaying just before or after that date can make a difference to the amount of tax you owe. For instance, if you make an extra repayment before 1 January, that amount won’t be part of your taxable base on the reference date and therefore won’t be subject to wealth tax (box 3). If you make a repayment just after 1 January, your taxable base will remain the same in that tax year and any wealth above the tax-free allowance of €57,000 (€114,000 for tax partners) will be taxed.
Whether it makes sense to make extra repayments on your mortgage depends on your personal financial situation and your mortgage terms and conditions. If you still have an endowment mortgage, making repayments can actually work against you. So make sure you explore all your options and weigh up the pros and cons.
What's the best thing to do in your situation?
As you’ve read, mortgage interest deduction is a complex subject. Amendments to legislation over recent years, such as the decrease of the mortgage interest deduction, the ‘Hillen law’ and changes to tax rates, don’t make things easier. If you’re unsure, it’s best to seek solid advice. Preferred Banking clients can discuss their circumstances and options with an expert adviser from our Preferred Banking team in a free Mortgage 360° consultation. You can arrange a consultation even if you have a mortgage with another provider.
