Regardless of the tax rules, we always recommend that these agreements be recorded at the notary. In this way it is also possible to reconstruct at a later moment what precisely the agreements made were. In the meantime, you can make changes to these agreements, for example after the first fixed-rate period has expired. That does not necessarily have to go via the notary. In the end, agreements are made through a loan agreement that the civil-law notary can refer to in the mortgage deed.
Which agreements are recorded as such?
- The interest rate;
- The duration of the fixed-rate period;
- The term of the mortgage and the commencement date;
- The principal and a percentage on top of this amount, usually 20%;
- The redemption method and period;
- The cancellation grounds of the mortgage;
- An increased registration possibly to be able to borrow extra later.
It is also nice as a lender of the money to have a good view of your assets so that you can live normally and are not dependent on this ability. We would also recommend to take the interests of any other children with you. Friction can arise if business is unregulated and other children have the impression that one child can be advantaged over the other child.
Interest not paid, only deductible?
Situations may arise in which no interest is paid at any time, temporarily or otherwise. Sometimes such a situation is created by simply forgetting the payment of the monthly obligation. Nevertheless, we strongly recommend that you always use the order to pay the periodic interest and repayment.
That you donate this later with a cash round is far more sensible than choosing to settle this on paper. Sometimes there is a possibility to qualify for interest deduction. Read the following story of a son who is in financial trouble with paying interest to his parents.
In 2002, this son took out a mortgage with his parents of € 45,000 to buy out his ex-partner. They had agreed an interest rate of 5%. Every year his brother and he receive a donation of € 5,000 which is actually paid up to 2009. Later this is no longer paid, but settled with the interest of the family mortgage.
The Tax and Customs Administration assumes that there is no right to interest deduction because the interest is not actually paid. The son does not agree with this and the Supreme Court makes a decision in 2015 about whether there is also deductible mortgage interest on this set-off.
Supreme Court ruling
In this specific situation, the Supreme Court is of the opinion that there is still deductible interest. The father has kept a thorough administration of donations and interest due. It was also important that the other son received the annual gift in cash or by bank. It was therefore clearly the intention that the other son would receive such a gift.
In addition, the son with payment problems previous years nicely paid the interest which was also relevant in the consideration.
In our opinion, proper administration has been decisive in dealing with this issue in combination with the donation tradition. It is better not to set off on paper and just apply the cash flow . This is by far the least hassle with the tax authorities and is a simple act.
What can I use a family mortgage for?
You are free to borrow or lend money for the goals you like. If you wish to make use of the interest deduction, the mortgage must be used for buying or renovating the owner-occupied home. You also have to pay off at least annuity for mortgages taken out after 1 January 2013 in 30 years. You can also decide to replace a mortgage before 1 January 2013 with a family mortgage. In such a situation, different – smoother – rules can apply.
When is the mortgage interest deductible?
To qualify for interest deduction the following rules are important:
- You pay a ‘normal’ business mortgage rate;
- You pay off the mortgage at least annuity;
- Repayment of the mortgage in a maximum of 30 years;
- The mortgage is recorded in writing;
- You must account for each tax year in the income tax return;
- You use the family mortgage money to buy, renovate or replace an existing mortgage for your own home.
Financial Advantage Family Mortgage
The financial benefit of a family mortgage often consists of a stack of benefits. For example, the yield improvement for the lender already exists if it receives an interest rate of 0.3% on a savings account and can now suddenly receive 3% or more.
You can also decide to return the yield benefit tax-free with the annual exemption for donations.
As mentioned earlier, the advantage can also arise in the disappearance of a top store with a mortgage. To make this concrete, a calculation example is given below
Mortgage Calculation With Family Construction
Your son or daughter buys a house of € 300,000 in 2018 and lends € 225,000 to the bank and € 75,000 to you. For the sake of clarity, we leave out the costs of the buyer and interest deduction.
Suppose you take out a mortgage at ING bank for 20 years, then the interest rate without the family mortgage would be 2.95%. Now that your son or daughter borrows € 75,000, the interest rate is 2.7% because the mortgage falls into a different risk class.
In the first year this is already indicatively an interest benefit of € 744 gross.
Suppose you also have a savings account with ING bank, then the interest rate is 0.05%. At the moment you agree to receive 3.95% with your son or daughter, your reimbursement will suddenly be 3.9% higher. In the first year that is gross gross € 2,904. You can then decide to return the interest with the annual exemption (2018) to € 5,363.
Applying Market-Based Interest
You may, as explained earlier in the article, agree on an interest that is in line with market conditions. You do not have to return this return benefit. Your son or daughter may also apply interest deduction to the mortgage or loan that you provide.
In total, you have therefore gained € 3,648 in gross profit by applying this construction. Every year this advantage decreases if we assume a mortgage with repayment component. Every year the outstanding principal and the mortgage interest due fall.
Curious about your options for a family mortgage with a total solution by a mortgage advisor or financial planner from our office? It is advisable to take a close look at all aspects and discuss this together with an advisor.
In summary, the benefits of a family mortgage are as follows
- The interest due is tax deductible;
- A higher maximum mortgage is possible;
- You may be eligible for a reduction of the interest surcharge with the first lender;
- The money stays within the family and can be lent back to the next generation at a later time;
- For the lender, the interest is not extra taxed in relation to an ordinary savings account;
It is possible to obtain a financial advantage by stacking things.