Paying off mortgage: to do or not to do?
Ever heard in your surroundings that it's 'stupid' to pay off your mortgage? Paying off your mortgage has tax implications. In many cases, this is favorable, but not always. In this article, you will read everything about the possible tax implications, and the other advantages and disadvantages of a mortgage-free house. This way, you will know exactly whether paying off your mortgage is wise or not.
Go directly to:
- Tax implications of a paid-off mortgage on tax in box 1
- Extra payments due to capital yield tax in box 3
- Other possible consequences of paying off your mortgage
- Conclusion: is it smart to pay off your mortgage?
Tax implications of a paid-off mortgage on tax in box 1
In the Netherlands, paying taxes is divided over different boxes. In box 1, you pay tax on your income from work and home. The mortgage interest that you pay annually to the bank can be deducted from your annual income. This is called the 'mortgage interest deduction.'
As a homeowner, you also need to add an amount to your income: the home ownership tax. This is a percentage of the WOZ value of your home (provided it is your main residence). If the WOZ value is between €75,000 and €1,310,000, a percentage of 0.35% applies in 2024.
When you start making extra payments or even fully pay off your mortgage, your mortgage interest deduction becomes less. Where the amount of mortgage interest was first higher than your home ownership tax, and you therefore did not have to pay any taxes, now you suddenly do. You would thus suddenly have to pay more taxes in box 1 because you have paid off more. As this outcome was not desirable, the Hillen Act was introduced.
Hillen Act: extra tax deduction for homeowners with (almost) paid-off mortgage
Under the Hillen Act, as a homeowner with a largely or fully paid-off mortgage, you are entitled to an extra tax deduction. The aim of the law was to continue encouraging homeowners (with an interest-only mortgage) to make extra or full payments on their mortgage.
Nowadays, it is mandatory to pay off your mortgage, so the law is actually no longer needed. Therefore, the tax deduction is being phased out more and more in the coming years. Each year, the percentage is phased out by 3.33%. In 2024, you receive a compensation of 80% on the difference between the home ownership tax and the tax deduction.
Example calculation
Suppose you have a house with a WOZ value of €400,000. You have fully paid off the mortgage. The home ownership tax is 0.35% x €400,000 = €1,400. This amount is called the 'addition,' as you pay extra taxes on this. You have no right to mortgage interest deduction because you have already fully paid off your mortgage.
If you pay 36.97% (bracket 1) tax in box 1, you initially pay €517.58 extra tax due to the addition. Thanks to the Hillen Act, you are entitled to 80% compensation of your addition in 2024. This means you have a tax deduction of 80% x €1,400 = €1,120. Ultimately, you pay 36.97% tax on €1,400 - €1,120 = €280. That amounts to €103 in taxes.
In most cases, the annual amount of interest you pay for a mortgage is higher than the (extra) tax you have to pay when largely or fully paying off your mortgage. In that case, it is generally beneficial to pay off your mortgage.
But beware: there are many more factors influencing your tax situation and whether it is wise or not to pay off your mortgage. Below you can read more about that. To see what is most beneficial for you, it is always wise to make an appointment with a mortgage advisor or financial advisor.
Want to know more about an appointment with a mortgage advisor? Discover more here:
Extra payments due to capital yield tax in box 3
In box 3, you pay tax on your assets. Your assets include your possessions minus your debts. Think of savings and investments, but also a second home that does not serve as your main residence. Up to a certain amount, you do not have to pay taxes. This amount is called the 'tax-free allowance' and is €57,000 in 2024. For fiscal partners, this amount is €114,000. In 2024, you pay 36% tax on the assets that exceed this threshold.
When you use part of your assets to pay off your mortgage, your assets decrease. Your home falls under box 1, provided it serves as your main residence. Therefore, it may be wise to make extra payments on your mortgage, especially if your assets threaten to exceed the tax-free allowance. Consider the situation where you suddenly receive a large sum of money, for example, from an inheritance.
Read up on inheriting a property.
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Other possible consequences of paying off your mortgage
Besides tax implications, a paid-off mortgage can also have other consequences. Below you can read about other matters you should consider if you are thinking about paying off your mortgage.
Possible impact on allowances
If you make extra payments on your mortgage, you may end up in a lower risk class (earlier). You will then pay less mortgage interest. That is beneficial for your monthly expenses, but it also means that you receive less mortgage interest deduction. Your taxable income in box 1 thus becomes higher. An increase in your taxable income can affect your right to and the amount of allowances. Therefore, thoroughly investigate the consequences for your allowances before making extra or full payments.
Possible loss of transitional law
On January 1, 2013, a number of new mortgage rules were introduced. For example, the rule was introduced that new mortgages must be paid off within 30 years on an annuity or linear basis to deduct the mortgage interest. For mortgages that already existed on December 31, 2012, the transitional law applies.
The transitional law ensures that the old rules regarding mortgage interest deduction and other tax benefits remain in place. So, people with an interest-only mortgage (taken out before January 1, 2013) can continue to use the mortgage interest deduction.
People who have the transitional law must comply with the new rules when taking out a new mortgage. So, if you make extra or full payments on your mortgage, you lose (part of) your transitional law. To continue to deduct mortgage interest, you must choose a linear or annuity mortgage for a new mortgage.
Possible tax consequences for the resale value scheme
If you have resale value when you sell your house and need a new mortgage for the purchase of your new house, you can deduct mortgage interest up to the following portion: the purchase price of the new house minus the resale value of your old house.
If you make extra or full payments on your mortgage, this can result in you being able to deduct interest over a smaller amount in box 1 for a new mortgage.
Example calculation
Suppose the purchase price of your new house is €450,000, and the resale value of your old house is €70,000. You can then deduct the mortgage interest over a mortgage of up to €380,000 (€450,000 - €70,000). If you have taken out a mortgage for more than €380,000, you cannot deduct interest over that portion in box 1. 
Conclusion: is it smart to pay off your mortgage?
As you have read above, the choice to pay off your mortgage depends on various factors. In many cases, making extra payments is a good choice, but there are also cases where it is less wise. Therefore, we always recommend talking to a mortgage advisor or financial advisor. They look at the entirety of your situation and can advise you in detail.
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