With an annuity based loan your gross monthly installments remain constant for a fixed interest rate period (*). These installments comprise two cost elements; interest and redemption (principal repayment).
From the charts you will see that , as the loan term progresses (often 30 years), the interest cost (typically shown in green on the chart) gradually decreases, while the redemption cost component (shown in blue) increases.
If you are taxed for your income in The Netherlands your tax advantage will diminish in time. Consequently, your net monthly cost level will increase over time.
The amount of interest paid (eligible for tax relief) decreases, while the redemption part (not subject to tax relief) increases.
(*) If your current fixed rate interval expires and a new one commences your monthly cost levels (both gross and net) will increase or decrease, depending on the renewed interest rate.
Key characteristics of an Annuity based loan:
- equal gross monthly costs during a fixed interest rate period
- interest cost component decreases in time whereas redemption cost component increases
- increasing net monthly cost level in time (provided interest paid is subject to tax relief)
- immediate principal repayment begins with the start of the loan
- higher total overall costs over 30 years compared to a similar linear variant
With a linear-based mortgage loan, your initial monthly costs will be higher than those of a comparable annuity-based loan. However, unlike an annuity loan, the total monthly installments decrease over time
The linear monthly redemption cost component is fixed during the loan, hence your interest cost component will decrease due to continuous decrease in “open balance”.
The total overall costs of a linear loan are generally lower than those of a similar annuity-based mortgage loan.
Summarized you will find the main characteristics of a linear based loan below
- decreasing monthly cost level due to linear construction of loan
- montly interest cost component decrease whereas redemption cost component stays equal in height
- hence; gross and net cost level decreases due to the linear character of the loan
- initial monthly cost level higher than similar annuity based variant, but decreasing in time
- total integral costs of loan in time lower than similar annuity based loan
Finally, there are also interest only loans but according the Dutch tax rules interest on these loans is NOT subject to tax benefits (AND often the bank will not borrow more than 50% of the market value in an interest only based loan). Besides you will have to pay back the loan in the end from private assets.
