Annuity mortgage: how do interest and repayments work?
With an annuity mortgage, you pay interest and repay principal each month. As long as the interest rate and other arrangements remain the same, the combined monthly payment for these two components stays the same. The proportions within that payment change: gradually, you pay less interest and repay more principal.
Responsible for the content: Ricardo Roso. Updated on .
What happens to your mortgage debt?
Interest is the charge for borrowing money. Repayment is the amount by which you pay back the debt. At the start of an annuity repayment schedule, the debt is still high. A relatively large part of your monthly payment therefore goes towards interest. Each repayment leaves a smaller debt, making room for a larger principal repayment within the same monthly amount next time.
If you follow the agreed repayment schedule and make all payments, this loan component will be repaid by the agreed maturity date. The debt falls more slowly at first than with a comparable linear loan. This may matter if you want to move within a few years.
A fixed gross payment is not a fixed net housing cost
The gross mortgage payment is what you pay the lender in interest and principal repayments. The net amount also takes account of any tax benefits. If deductible interest falls, the tax benefit becomes smaller when other tax circumstances remain equal. Your net mortgage cost may therefore rise even when the gross payment stays the same.
The certainty about your interest rate applies for your fixed-rate period. If that ends before the loan does, a new rate may change your monthly payment. Insurance, maintenance, municipal charges and any owners' association (VvE) contributions are separate from interest and principal repayments.
Annuity or linear: compare the same assumptions
With the same initial debt, term and positive interest rate, annuity repayments start with a lower gross monthly payment than linear repayments. Linear repayment reduces the debt faster from the outset. If the interest rate stays the same throughout the comparison, linear repayment therefore involves less interest overall. This means the lowest first monthly payment is not automatically the cheapest choice over the full term.
Also read our explanation of a linear mortgage and compare how much money you want to have left each month.
When is mortgage interest deductible?
For new owner-occupied home debt from 1 January 2013, repayment at least on an annuity basis within no more than 30 years is a condition for interest deductibility. The use of the loan and your tax situation also matter. An annuity mortgage therefore does not automatically give a right to deduct interest. Older loan components may be subject to different rules and a deduction period that is already running.
What should you discuss before choosing?
Look beyond the first payment. Set out your fixed expenses, financial buffer and any changes in income. Also consider a growing family, working fewer hours or retirement. When making additional repayments or changing the mortgage, ask about the contractual conditions, any charge and the effects on the schedule.
Read how mortgage advice at RFD takes account of your personal housing plans.
Start with an indication of your borrowing capacity
A calculation helps you explore your options. The RFD calculator uses an annuity repayment basis with a 30-year term and a reference rate for NHG with a 10-year fixed-rate period, for an owner-occupied home. It is not a product comparison or a promise from a lender.
Want an initial idea? Calculate your maximum mortgage.
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Frequently asked questions
Will my monthly payment stay the same for thirty years?
Only if factors including the interest rate and repayment schedule remain the same. A new fixed-rate period, additional repayment or change may alter the gross payment.
Is an annuity mortgage the same as an interest-only mortgage?
No. Annuity repayment means repaying according to a schedule. An interest-only loan component has no such regular principal repayments and leaves a debt that you must repay later.
Can I make additional repayments?
Your mortgage conditions set out the options and any charges. Also consider how much readily available money you will have left after an additional repayment.
This is general information, not personal mortgage advice or a finance offer. Your options and the tax implications depend on your circumstances and the provider's terms. Read the disclaimer.
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Sources for this guide
General information from RFD. Sources consulted on . Rules and terms may change.
What would you like to discuss?
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