Do you want to use your home equity?

Figures from Statistics Netherlands on the price development of private properties in the Netherlands shows that the average price in mid-2022 was almost double its lowest point in June 2013. In 2023, those sharp price increases appear to have tailed off – for the time being, at least. Of the total equity in Dutch homes, most is held by people aged 50 and over.

Home equity is the difference between your property’s current value and the amount you owe on a mortgage. For instance, if your home is worth €650,000 and your outstanding mortgage is €250,000, your equity is €400,000. Your home equity jumps up if your home’s current value has substantially increased or if you’ve paid off your mortgage.

• You want to continue living in your current home and want to modify or renovate it or make it more energy-efficient.
• You want to release the equity and spend the money as you wish, such as on travelling or a gift to your children to help them purchase a home or pay off a mortgage.
• You have a low income and want to release the equity to top up your income.

An initial option to use your home equity is to sell your house and move into rented accommodation. If you’ve sold your home, you must pay off the mortgage you still owe. If your house sells for more than your outstanding mortgage, you’ll have plenty of equity to repay your loan and any remaining equity is yours to spend as you wish.

If you’d rather purchase another property than rent one, be aware of the ‘bijleenregeling’ or additional loan scheme. This tax rule encourages you to invest the equity from the sale of your home in the purchase of your new home. If you choose not to do this, you lose the right to tax-deductible interest on part of your new mortgage, as this part will come under box 3 (income from savings and investments).

If you have equity and want to continue living in your home, you could consider increasing your mortgage and using part of the equity to renovate your home or make it more energy-efficient. This equity allows you to make an extra investment in your home, even if that investment won’t increase the value of your home by the same amount.

The additional mortgage usually comes under box 1 (income from work and home ownership), and you’re entitled to a mortgage interest deduction. However, under a rule in force since 2013, you must pay back the additional mortgage within 360 months as part of an annuity or linear repayment scheme.

In some cases, you may be able to take out an interest-only mortgage. An interest-only mortgage is exactly what it sounds like: instead of paying off the loan, you pay only the interest on the loan during the loan’s term. You repay the mortgage in full upon its maturity date, or you may have the option to extend the term.

Under the Code of Conduct for Mortgage Loans (GHF), a bank may lend no more than 50% of the home’s value as an interest-free mortgage. You may therefore qualify for an interest-free mortgage if you have sufficient income and can afford the interest payments. Interest-only mortgages taken out after 2012 don’t qualify for a mortgage interest deduction, unless they fall under transitional arrangements.

As interest-only mortgages don’t fulfil the conditions for claiming a mortgage interest deduction in box 1, these loans come under box 3 of your income tax return.

If you don’t want to invest the equity in your home, you can still take out an additional mortgage at an attractive rate. This loan will come under box 3, even if you make repayments during the term of the mortgage.

A third option is to take out a Home Equity Mortgage. You can apply for this type of mortgage if you and your partner are both 62 or older. With a Home Equity Mortgage, you decide in advance whether you want to withdraw the cash as a lump sum or as monthly instalments to top up your income. As this additional debt comes under box 3 of your income tax return, the interest you pay isn’t tax-deductible in box 1 (income from work and home ownership).

The interest on the equity release is added to your mortgage debt, increasing the part that comes under box 3. So your monthly repayments stay the same unless your increased mortgage debts push your current mortgage into a higher rate category, leading to a higher interest rate. This differs from an interest-only mortgage: you pay interest (usually on a monthly basis) during the term of the mortgage. When you pass away, your heirs or beneficiaries will have to pay the Home Equity Mortgage in full.

If you’d like to discuss your options with an expert, join a free Mortgage 360° consultation with one of the advisers on the Preferred Banking team. You can arrange a consultation even if you have a mortgage with another provider.

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