Do you have a house with a substantial surplus value? Then you can in principle use that extra value for extra income in addition to your pension. For this you have to take out an extra mortgage or a eat-up mortgage. Whether this is a sensible solution for you depends on a number of things, including your expected spending pattern if you want to stop working. Read also: Using your home equity? 8 things you should pay attention to with the eat-up mortgage
Despite the cooling of the housing market, many homes still have a substantial surplus value. That is the value of the house after deduction of the mortgage that is still on it. On average, this is no less than 175,000 euros per home, according to the appraisal company Calcasa figured.
The over-65s in particular are among the prizewinners. An earlier measurement by Statistics Netherlands showed that they have an average surplus value of more than 312,000 euros. For the over-85s, this even amounts to an average of 351,000 euros, as you can see in the table below from Van Bruggen Advisory Group.
This is due to the rise in house prices in recent years and because many older homeowners have already largely or fully paid off their mortgage. 30 percent of homeowners aged between 65 and 75 no longer have a mortgage at all, rising to 62 percent among the over-85s.
A low or fully repaid mortgage will reduce your monthly costs. Unfortunately, your wealth is in stones, so you cannot reach it. Only when you die or sell your house is that surplus value released.
Read also: This is how fast house prices in the Netherlands have risen in 30 years: owner-occupied homes are on average worth 5 times as much
Using home equity for extra pension
Fortunately, for those who want to cash in on the surplus value now, there are possibilities to take an advance on the expected sales proceeds of the house. You then take out a loan and this gives you more to spend, without having to move.
Such a supplement to your income can come in handy, especially if you have to manage on a low pension. For this reason, the owner-occupied home is also referred to as the fourth pillar of our pension, after the AOW (first pillar), the pension you accrue with your employer (second pillar) and individual pension schemes, such as an annuity (third pillar).
Read also: AOW gap: this can mean a lower benefit for your pension
What are the options if you want to use the assets in your house for extra income?
Option 1: take out an extra mortgage
The cheapest option is to ask your lender for an extra mortgage loan. You then put this money in a savings account, from which you transfer an amount every month to your checking account. You can then spend this money freely.
Suppose you have a house worth five thousand euros, which still has a mortgage of 40,000 euros. You could then approach the lender for an additional interest-only mortgage of 90,000 euros, at an interest rate of 4.6 percent. If he agrees, you can withdraw 750 euros per month for ten years.
Of this, 345 euros per month goes to interest payments (unfortunately you do not get a mortgage interest deduction). The remaining 400 euros is freely available, according to Van Bruggen Adviesgroep. The equity on your house then drops from 460,000 euros to 370,000 euros.
The advantage of this construction is that you can decide for yourself when you withdraw the money and what you spend it on. A disadvantage is that this piggy bank is used up after ten years, while you still have to continue to pay the mortgage interest, since you have not repaid anything. But if you still sell your house afterwards and move to a rented house or a cheaper owner-occupied house, that does not have to be a problem.
Such an extra mortgage is not possible for everyone. Your income and the equity in your house must be high enough for the lender to agree.
Also, not every bank is eager to provide money that is not put into the house (for example for a renovation or painting), but is used for something completely different, such as a new car or a long trip.
Option 2: eat-up mortgage or cash-in mortgage
If there is a lot of equity on your house, but your income is too low for an extra mortgage, you can also try to take out an eat-up mortgage. This is also known as a cash-in or home equity mortgage.
This is a kind of reverse interest-only mortgage, where you receive an amount every month or in one go. You do not repay anything during the term. The bank does charge interest every month. But unlike with an extra mortgage, you do not pay that interest from your monthly income, but it is added to your debt. As a result, your mortgage debt is growing faster and faster, while your equity is shrinking faster and faster.
So you actually eat the surplus value. Only when the house is sold (after your death or if you move house) is settled with the mortgage lender.
The fact that you do not lose part of your income every month on interest is beneficial if you have a low income. Another advantage is that you do not increase your mortgage all at once, but in small – but increasingly larger – steps.
Some lenders provide a so-called residual debt guarantee. If you have properly met all the conditions and the proceeds of the house are too low to pay off the debt – for example because house prices have fallen sharply – then the lender will pay the difference.
This construction is more expensive than an additional mortgage, because the mortgage interest is slightly higher. If the interest is not fixed for the entire term of the loan, you run the risk of a larger residual debt if the mortgage interest rises in the meantime.
Another disadvantage is that you are not allowed to deduct the mortgage interest from your taxable income; not even if you put the money into your home. Furthermore, many lenders refuse to offer such an eat-up mortgage if you already have a mortgage with a competitor.
Your equity decreases and so does the estate
Whichever option you choose, keep in mind that the equity of the home decreases if you borrow extra money. This also reduces the value of the inheritance that you leave to your children or other heirs.
Whether it is wise to borrow extra money to supplement your pension depends on your personal situation, says Hans André de la Porte, spokesperson for the Home Owners Association. “It is important that it is an arrangement that you can maintain in the longer term. Of course you do not want to get into financial problems later because you have spent too much money.”
Banks are therefore cautious when assessing applications for an extra loan. According to André de la Porte, they not only examine your income, but also your expenses. “If you live in an old, large house, the bank will be more reserved than if you have an energy-efficient house, because you have a high energy bill,” he explains.
“In addition, lenders look at your health, for example, with a view to future healthcare costs. The spending objective is also important. Do you want to use the loan for adjustments to your home, which will increase the home value? abroad or to support your children with the purchase of a house? Banks look at the overall picture.”
Eating house is more difficult than ten years ago
Van Bruggen Adviesgroep states that eating up part of the equity in your house is a lot more difficult than, say, ten years ago. Mortgage rules have been tightened considerably to protect home buyers against themselves.
Many large interest-only mortgages were taken out at the time. Subsequently, when house prices plummeted, there were more than a million households with a mortgage that was greater than the value of their home. They ran the risk of a residual debt when selling their home.
The new rules have reduced these risks for homeowners. But according to Van Bruggen Adviesgroep, some groups are unfairly disadvantaged by it; especially homeowners with a lot of equity and a less good pension income.
It regularly happens that homeowners cannot get an extra mortgage despite a surplus value of several hundred thousand euros, which means that they are forced to sell their house if they want to increase their spending capacity. They then end up in an expensive rental home, while with an extra loan they could have continued to live in their home for years and at a lower cost.
Van Bruggen Adviesgroep believes that the over-65s should be given more opportunities to eat up a larger part of their surplus value. Won’t this cause problems? André de la Porte of the Home Owners Association thinks this is not too bad. “Of course you have to prevent the money from running out at a certain point. But we see that most people do not feel the need to make maximum use of the surplus value. It really concerns older people with considerable surplus value.”
READ ALSO: Retiring before the age of 67? This is what it costs if you use the equity of your home
2023-09-03 06:34:48
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