Settle an argument

flossyblog

My partner and I have had the following disagreement since he took out a second mortgage in 1998. It is an interest only mortgage for 45,000 guilders (he's dutch)

His point of view

He got 45,000. He pays interest only and then when the mortgage is up he will have to pay the full 45,000. Obviously with the euro kicking in it works out approxmately €20,500.

in the meantime he is paying back interest only until the mortgage finishes and then he has to repay the entire sum. I thought it was a mad idea at the time but he told me that it was tax deductable and in effect the interest was offset by the tax relief.

He is vague with how much the interest is and he also doesn't know how much tax relief he receives for it.

His stance is that the money is a free loan

I disagree because

he asked for 45,000 minus 1600 for costs.

he's paying monthly, doesn't know exactly how much but the figure of €92 has been bandied about.

He doesn't know how much tax relief he receives on this.

and finally he will have to pay back the full amount when the mortgage term is up.

for me it seems cut and dried that it's a bad deal or am I really missing something

I keep saying there is no such thing as free money but he disagrees.

opinions4u

Without knowing the actual interest rates and understanding the tax relief I don't know how it can be cut and dried one way or the other.

betmunch

As long as theres an interest to pay on it, or set up fees, its not a free loan, unless the tax relief is 100% of the payments.

If hes invested the money and is getting a better return than his net cost it could be considered free money I spose, but thats a personal opinion.

Cant really see why its worth having an arguement with a loved one over though

The_J

As betmunch says, if the interest rate is less than you can invest money elsewhere then theoretically it is free money.

Tax relief is possible on investments. As opinions4u says, without knowing more it's hard to explain specifically.

As long as you know that the money has to be repaid at the end of the term and have a plan in place to repay it you should be fine.

flossyblog

Thanks I understand a bit more now.

The original money has long gone. However shortly after taking out the second mortgage I took control of everything and within six months we were both doing very well. Since then we have built up savings which are never used and have been in a position to pay it backwithout it affecting our lifestyle. We are also due to come into an inheritance, the reason why this subject has come up.

We haven't invested in any dutch equivalent to ISA's, just a normal interest savings account. We are in a position where we can do anything we want without it affecting our savings. As we will receive more money this year, I am wondering whether is is better to pay off this interest only loan or leave it until it's full term.

I understand from the replies, in order for it to be beneficial the tax relief has to wipe out the repayment.

What should we do with our savings?

He is going to look into the amount he is paying this second interest paying mortgage repayments. He will also check out the tax relief he is receiving on the loan.

nomoneytoday

It looks like an interest only mortgage to me.
You pay of the interest monthly, and then clear the EUR 20k balance downstream when you sell / retire etc

The_J

It's clearly interest only. It sounds like that property is rented out so the tax relief is on the rental income (i.e. only pay tax on that income above the interest element?)

flossyblog

Just to clear up any misunderstanding.

There are 2 mortgages on the same property and it is the one we both live in.

The dutch tax relief was very generous pre 2000 on certain types of mortgages and loans. Their financial institutions are do not lend out large sums of money without security.

Those types of mortgages are no longer available. My OH got it to take advantage of it just before they abolished it.

I understand that in the olden days many dutch householders would take out this type of second mortgage on their main home. The idea being that 25 years later the loan taken out was peanuts comparitively. The government allowed it so householders could spend it on home improvements etc. However as time went by more people were taking out these interest only loans to finance other items and it was costing the government money, because of the tax relief on them.

The_J

Do you live in Holland?

flossyblog

Yes I do, sorry should have cleared that up too

The_J

LOL oh jesus, well I haven't got a clue then.

As long as you've got the money set aside to pay off that amount then you should be fine.