In a press release on the Ministry of Finance’s website, Deputy Minister of Finance De Jager has made two concessions for the repayment of an endowment mortgage. The press release intends to clarify issues that have been muddled by various press reports. First, even if the debt is no longer related to the owner-occupied residence, as a result of 30 or more years of mortgage interest payments, the taxpayer can still receive the capital distribution, which is meant to be used to repay the that debt, tax free. Second, taxpayers are concerned that the elimination of the cheaper home rules, effective from 2010, could stop them from receiving their tax-free distribution. The Deputy Minister has determined to reassure taxpayers in this situation.
The endowment mortgage is a way of saving, with tax concessions, towards the repayment of debt related to an owner-occupied residence, in Box 1. An endowment mortgage insurance policy is linked to the owner-occupied residence debt, known as endowment insurance linked to home ownership (“endowment insurance”). The interest element of the endowment insurance distribution remains untaxed as long as the distribution does not exceed EUR 147,500 and is used to repay the owner-occupied residence debt. At least 20 years of premiums must have been paid, and the highest premium may not exceed ten times the value of the lowest premium. There is also an exemption for endowment mortgages with 15 to 20 years of premium payments, but this is considerably lower (EUR 33,500). Alternatives to the endowment insurance have existed since 2008, including a tax-efficient blocked annuity savings account and tax-efficient blocked annuity investment account.
Repayment of endowment mortgage after 30 years
Since January 1, 2001, interest on owner-occupied residence debt is deductible for up to a maximum of 30 years. After 30 years, the link between the debt and the owner-occupied residence ceases to exist and the debt moves from Box 1 to Box 3. It is possible to take out an endowment insurance years after the debt related to owner-occupied residence was incurred if, for example, the mortgage was originally an interest-only mortgage. This means it is conceivable that, after 2030, the endowment insurance could be distributed following 20 or more years of payment, after the 30-year term of the mortgage has lapsed. Theoretically, this distribution could no longer be used to repay an owner-occupied residence debt, so the distribution’s element of interest would not be exempt from tax, but would be progressively taxed in Box 1. The Deputy Minister indicated, however, that the distribution would remain untaxed in these circumstances, as the debt was originally related to an owner-occupied residence.
Elimination of the cheaper home rules
Since 2004, the rules on top-up loans have acted as an incentive for using the surplus value – the proceeds from the sale less the mortgage debt – from the sale of the previous home towards purchasing a new home. Insofar as more is borrowed for the new home than the purchase price less the surplus value of the old home, the interest on the extra amount borrowed is not deductible in Box 1. The rules on top-up loans therefore mean that the debt on which the interest is deductible would be reduced by moving to a cheaper home. The cheaper home rules, however, prevent that from happening, which means that the interest deduction from the amount of the previous mortgage remains at the same level (except when the purchase price of the new home is even lower than the amount of the previous mortgage).
The cheaper home rules will be scrapped, effective from 2010. It is possible that a move to a cheaper home could result in no, or almost no, owner-occupied residence debt, because the surplus value of the old home is as high as, if not higher than, the purchase price of the new home. If the endowment mortgage insurance that used to repay the debt related to the former owner-occupied residence as a matter of necessity – since there is no longer any interest deduction possible– has not been running for 20 years at the moment of repayment, the high exemption cannot be used in Box 1. The Deputy Minister sees this as an undesirable effect of scrapping the cheaper home rules, which is why he has approved maintaining the exemption for the endowment mortgage insurance in such circumstances.