@Nederstash and @Dutch Comfort Thanks for sharing your interesting scenarios in Holland! Seems continental banking practices are all about keeping mortgage holders in debt by using prepayment penalties to reduce early prepayment of loans (presumably to keep the banks mortgage backed securities from losing value from balance reductions that reduce interest payments to their bond holders?) And seems your bankers tend to favor the option to simply fully refinance loans instead of monthly prepayments (presumably to earn more loan origination fees, make mortgage bondholders more likely to earn your new loan's interest payments and keep the whole debt cycle going as long as the bank can?) If so, the above seems to favor Neder's approach of a side account to grow to ultimately be able to write a check to pay off when ready to minimize penalties. Curious how much in %age terms does it cost to simply payoff an ENTIRE loan in prepayment penalties there? Does it vary by credit level or total mortgage balance for example? And how much can be deducted from income taxes for mortgage interest?
Mortgages here are interesting! A mortgage can be for no more than 100% of the house value (which can be lower than your purchase price, especially is these crazy housing market, so the rest is a obligatory downpayment). A mortgage of 50% or more of the house value (which, again, is not the purchase price) should be repayable on a straight line basis or as an annuity, the other part (max 50% of the house value) can be taken as a non-repayable loan. For the straight line /annuity part, you can get a tax deduction on the interest paid. For the non-repayable part, no tax deduction on the interest.
Usually, for the straight line / annuity part, you can repay 10% extra (sometimes 20%) without any penalty. If you pay more, the penalty is equal to the interest missed by the bank. For the non-repayable part, you can usually repay on a voluntary basis somewhere between 10-20% without any penalty. Again, the penalty is equal to the interest missed by the bank.
The above is the general structure since around 2010 because before that, mortgages could be on a fully non-repayable basis. So when you signed a contract for 30 years, you only paid interest, no repayment of principal. This changed after the financial crisis to the structure above, because a lot of people who had 100% non-repayable mortgages did not have the discipline to save for the repayment (which is due in 30 years in 1 go, or you had to refinance).
If you see our structure we have M1 which is non repayable for EUR 254K. I do not worry about that, since we're planning on selling the house in the future (house value is currently EUR 650K) and move to a smaller house once the kids are on their own.
M2 is repayable on a straight line basis in 20 years (currently 12 years and EUR 71K left). I want to get that part out of the way ASAP, since this will decrease our monthly expenses and then we can start repaying M1 if we want (or setup an account to grow, that is to be decided.....).
So, this is a little insight in the Dutch mortgage maze..... it is not as straight-line (pun intended) as you would think......
