People under 35 increasingly choosing interest-only mortgages
Due to the low mortgage interest rate and the ever-rising house prices, the interest-only mortgage is rapidly gaining popularity, especially among young home buyers. That applies to purchasing a new home and increasing the current mortgage, reported mortgage advisor De Hypotheker. By taking part of their mortgage as interest-only, they can significantly reduce their monthly payments.
An interest-only mortgage, called an aflossingsvrije hypotheek in Dutch, is a type of mortgage in which you only pay interest until the maturity date, according to information from homeowners' association Eigen Huis. Because you only pay interest, you have to repay the loan in one go when its end date comes. Your mortgage debt remains the same throughout the term unless you decide to make repayments above the interest rate.
The number of young homebuyers who applied for an interest-only mortgage in 2021 increased by more than a quarter compared to a year earlier. According to Menno Luiten, commercial director of De Hypotheker, this can be explained by the low mortgage interest rate in combination with the explosive rise in house prices. Although first-time buyers cannot benefit from the mortgage interest deduction for the interest-only portion, the lower monthly costs outweigh this thanks to the low interest rate, Luiten explained.
Among young homeowners up to the age of 35, the number of interest-only mortgages to refinance or improve their homes even increased by more than 115 percent. This explosive growth is mainly due to the desire to renovate or make the existing home more sustainable. Due to the extremely high house prices, young homeowners prefer to invest in their existing home, possibly by using the equity of the said home.
Older age groups are also opting for an interest-only mortgage to use in a similar way. This type of mortgage grew by 26 percent in the age group 35 to 45. But mortgage applications for purchasing a home with an interest-only component fell by 23 percent in this age group. This can be explained by the overheated housing market, which is reducing the number of mortgage applications for the purchase of a home. A similar trend can be seen in the 45-55 age group and among over 55-year-olds.
The interest-only mortgage entails some risks. In the event of an unexpected sale, you may be left with a high mortgage debt because you repaid too little. At the end of the term, you must also have sufficient capital to make the repayment, which is not always easy.
Reporting by ANP and NL Times.