For years, savings interest rates were extremely low. This made it financially attractive to use savings for an extra portion of the mortgage repayment. On balance, this could make a difference in interest costs. But savings interest rates are now back at a somewhat higher level, while mortgage interest rates are fairly stable.
It may therefore be interesting to look again at the trade-off between keeping savings at the bank and making additional mortgage payments. A number of points are important. Below we discuss the 5 most important things.
To begin with, making additional mortgage payments is not simple or logical for every mortgage type. For example, if you have an annuity mortgage, the monthly mortgage costs already include a portion of the repayment as standard. The question then is whether you want to make accelerated repayments on top of that.
The simplest thing is to make extra repayments on an interest-only mortgage. After all, this concerns a debt that is still outstanding at the end of the term and must be repaid in one go or refinanced with a new loan.
Interim repayment of an interest-only mortgage can therefore be an interesting option. The mortgage conditions usually state that you can repay 10 percent to 15 percent of a mortgage without penalty within one year. It is useful to check this, because if you want to repay higher amounts early, you may be faced with a penalty scheme. It is therefore important whether your current mortgage interest rate is lower than the current market interest rate for mortgages.
2)Savings: make sure you have a financial buffer for unforeseen circumstances
If you use your savings to pay extra for your mortgage, you are in fact putting your own equity in stones. It is not that easy to remove that, unless you make big decisions, for example selling your house.
The first thing to remember is that it is smart to always keep a savings buffer for unforeseen circumstances, such as a leaking roof or a broken central heating boiler. If you still have excess savings, you can consider using it for additional mortgage repayments.
3)Savings interest versus mortgage interest: pay attention to mortgage interest deduction
The general rule is that if the mortgage interest rate is higher than the savings interest rate, it may be financially interesting to use savings for additional mortgage repayments. But you must take all relevant factors into account.
For example, with regard to mortgage interest, it is important whether you are entitled to mortgage interest deduction. For example, suppose you pay a mortgage interest rate of 4 percent for a 10-year fixed interest-only mortgage.
Since the tax benefit of mortgage interest has been approximately 37 percent since 2023, even for higher incomes, a gross mortgage interest of 4 percent then amounts to 2.52 percent net.
Please note that the benefit of the mortgage interest deduction for interest-only mortgages only applies if you took out the mortgage before 2013.
4) Savings interest versus mortgage interest: pay attention to tax on capital in box 3
You also have to pay attention to the savings interest, because from a tax perspective, savings fall under box 3 of the wealth tax. This year there is an exemption of 57,000 euros per person. For tax partners it is double this amount.
As long as you use savings that fall under the exemption, you can count on a regular savings interest rate. For example, if it is 2.5 percent and the mortgage interest including the interest deduction is also 2.5 percent, then it becomes a bit of a waste of money whether to use your savings for extra mortgage repayment.
However, if you only receive 2 percent savings interest or even less, it may be financially more advantageous to reduce the mortgage interest costs by using savings.
If you invest savings that exceed the exemption in box 3, you also have to pay attention. With this tool from berekenhet.nl you can find out what the expected tax burden on savings is this year. For example, if you have a ton of savings, you are expected to pay 159 euros in tax.
Of this amount, 57,000 euros is exempt, so the tax burden on the remaining 43,000 euros is approximately 0.37 percent.
If you use part of the 43,000 euros above the tax exemption for additional mortgage repayments and receive, for example, 2.5 percent savings interest in return, then after deduction of the tax in box 3, this effectively amounts to 2.13 percent interest.
In this case, if you compare a net mortgage interest rate (including mortgage interest deduction) of 2.52 percent with a net savings interest rate of 2.13 percent, then extra repayments can be beneficial again.
5)Look at the effect of inflation on mortgage and savings
Finally, there is the effect of inflation. In the Netherlands, the average price increase of goods and services fell slightly below 3 percent in February. Depending on the savings interest rate you receive, the purchasing power of savings erodes more or less quickly.
If you receive a savings interest rate of almost 3 percent, your savings will retain their value. But at an interest rate of 2 percent, the purchasing power of savings decreases.
On the other hand, inflation can also have an effect on debt. This is often an indirect effect. For example, the pressure of monthly mortgage costs may decrease if you have received a pay increase due to inflation. If you have a higher net salary, the mortgage costs will have less of a negative impact on your monthly income with a fixed mortgage interest rate.
The effect of inflation on the value of your savings and the extent to which a wage increase makes your mortgage debt feel less burdensome are also factors that you can take into account.
