If you want to buy a home, you can arrange financing in various ways, and you can also combine these methods.
Equity
If you have already built up a certain amount of capital yourself, you can choose to use part of your money to purchase your home. Whether this is more advantageous depends on the situation.
Benefits
- You have less debt and pay less interest on your loan.
- You run less risk of residual debt when you sell your home.
- You do not pay wealth tax on the surplus value of your owner-occupied home, but you do pay wealth tax on your savings above a certain amount (everyone pays wealth tax above $50,000 (2021) / $50,650 (2022). You are a tax partner, an amount of $100,000 (2021) / $101,300 (2022). The amount depends on your assets.
Cons
- When you sell your home, you have a higher equity value, which can have tax consequences when buying another home.
- You can no longer use the money invested in your house for other purposes and unforeseen expenses.
Pay attention!
It is not easy to say whether or not investing your own money is more advantageous; this depends on your situation and the circumstances. What is the mortgage and interest amount, your taxable income, and what good do you receive from your savings? How do tax advantages and disadvantages outweigh each other?
Donation
Parents may donate $106,671 (2022) to their (foster) child between the ages of 18 and 40. This donation must be used to purchase, improve, or maintain the owner-occupied home or repay the house acquisition debt.
Benefits
- You pay no gift tax.
- The one-off exemption applies per donor and not per recipient. As a recipient, you can, therefore, receive a gift from several donors. Note: This does not apply to divorced parents. Their donation is based on parentage and is added together.
Cons
It would be best if you recorded the donation yourself. If you do not do this, it can cause problems after, for example, the end of your relationship. As a result, you can lose half of the donation. Therefore, recording what everyone contributes to the house purchase is wise.
Pay attention!
You may only use it for the amount you donate:
- Buying or renovating your own home
- Paying off a home acquisition debt
- The costs of improving and maintaining your own home
- The commutation of the ground rent for an owner-occupied home
- Paying off the residual debt of the sold owner-occupied home
You must file a gift tax return. You will then receive a zero assessment because you have an exemption.
When (partially) paying off your mortgage, consider that you pay any penalty interest that lenders sometimes charge. Check whether this is the case or whether it is possible to repay a specific part at least once a year without penalty.
Mortgage Through Third Parties
You can also take out (part of) your mortgage with a third party; this usually happens with a family member.
Benefits
- Together, you can determine the amount to be borrowed (within the maximum mortgage you can take out).
- You can determine the interest and repayment to be borrowed together (fitting within the tax bandwidth).
- You can determine the term together, with a maximum of 30 years.
Cons
- Without advice, you risk a mortgage that is too high and does not meet the CHF standard (a standard intended to ensure that people borrow responsibly).
- The mortgage lender cannot spend the money on other things.
Pay attention!
- The interest rate of a family mortgage must be comparable to the market interest rate for mortgages with the same term and similar conditions.
- The borrower’s monthly expenses must be in balance with income.
- Put the agreement in writing.
- Think about what happens in the event of the death of the mortgage lender or borrower.
Mortgage Through Bank
You can also borrow (part of) the money from the bank. There are two mortgage types that you can choose: an annuity mortgage or a linear mortgage.
Annuity Mortgage
You pay the exact gross monthly costs (interest + repayment) with an annuity mortgage. Initially, this is mainly interest and only a tiny part of repayment. Over time, the interest portion becomes smaller and smaller, and you pay off faster and faster.
Benefits
- After the 30-year term, you no longer have any debt.
- You have a tax advantage, which means deducting the interest you pay on your mortgage.
- Due to the tax advantage, you start with low net monthly costs.
Cons
Your net monthly payments keep increasing over time because you pay a lot of interest in the beginning and pay little off, and in the end, you pay little interest and pay off a lot. As a result, your tax benefit decreases during the term.
Linear Mortgage
With a linear mortgage, you balance the same amount every month. Your gross monthly costs (interest + repayment) are higher initially. Over time, your monthly payments decrease because you pay less and less interest.
Benefits
- Your net monthly costs decrease over the years because you pay less and less interest and will no longer make repayments.
- After the 30-year term, you no longer have any debt.
- You have a tax advantage, which means deducting the interest you pay on your mortgage.
Cons
- In the beginning, your monthly payments are higher
In addition to the repayment amount, you pay monthly interest. The monthly interest (and the residual debt) decreases with the repayments, so your tax advantage decreases over time.
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