Financial Considerations Surrounding Finding a Home
By Stephanie Dijkstra
One of the most important issues involved with buying a house – in fact without these you could not buy one – is finances. You either have to be able to rent a home, buy it, or finance it and there are certain tax issues to be taken into account, as well.
Renting a Home
Renting a house in the Netherlands is expensive, especially if you need to rent in the western part of the country or close to international schools. There is no tax facility for renting a house whatsoever. With any luck, your employer will choose to compensate you for the housing costs. But in that case, be aware of the tax consequences, see the following paragraphs:
Free Housing Taxable
If you are a resident of the Netherlands (resident taxpayer or partial non-resident taxpayer), any compensation for housing provided by your employer constitutes taxable income. Whether you will have to pay the tax yourself depends on your contract; is it net or gross? If you are a ‘real’ non-resident taxpayer, you may benefit from an exemption during a period of two years, under certain conditions.
Special Treatment Under 30%-Ruling
If you are a resident of the Netherlands (also if you are a partial non-resident taxpayer), in principle the full benefit resulting from the fact that your employer is providing you with housing is a taxable benefit.
If you benefit from the 30%-ruling, special rules apply. A part of the rent may be qualified as an ‘extraterritorial expense’. That part of the rent can be compensated free of tax (thus reducing the amount of the fixed 30%-allowance!)
If you are a non-resident of the Netherlands, any compensation of double housing expenses is regarded as compensation for extraterritorial expenses: tax-free, but resulting in a reduction of the 30%-allowance.
‘There is no tax facility for renting a house whatsoever’
Buying a Home – Taking Out a Mortgage
If you have decided to buy a house, you are faced with the question of what will be the most appropriate type of mortgage. The recommended mortgage depends on your special tax position and whether you are likely to move again. In these paragraphs we provide a brief explanation of the relevant types of mortgages available in the Netherlands – whereby we point out that if you take out a new mortgage, you will only be allowed to deduct your mortgage interest from your taxable income if you take out a mortgage with straight line redemption or an annuity mortgage. We will also give a few recommendations as to which types are best suited to your specific tax status.
Usually a mortgage has a duration of 30 years. Here, we will discuss the three principal types of mortgages and give a brief summary of the mortgages that can no longer be newly taken out.
Mortgage With Straight Line Redemption
The most important characteristic of this mortgage is that the loan is repaid yearly in equal installments (i.e. straight line). As a result of the repayments, the amount of interest payable diminishes every year. Since the interest expenditure decreases steadily, this mortgage is best suited for borrowers who cannot fully benefit from the tax relief on the interest payments.
The chief characteristic of an annuity mortgage is that the yearly total of redemption and interest payments remains the same throughout its duration. Although the total remains the same, the mix of interest and redemption of course changes over the years. Owing to this balance between interest and redemption, the redemption is not on a straight line basis.
In the first years, the amount paid by the borrower consists mainly of interest payments. Hence there is a large tax relief in the initial years. Consequently, an annuity mortgage is ideal for people who wish to have a large tax relief in the early years and expect to have a sufficiently high income in later years to be able to make the redemption payments that do not qualify for tax relief.
Nationale Hypotheekgarantie (NHG)
With a Nationale Hypotheek Garantie (National Mortgage Guarantee), the Stichting Waarborgfonds Eigen Woningen (Homeowners’ Guarantee Fund) guarantees payment of the mortgage. In return for this you pay the NHG a one-time fee (0.7% for 2020). If you cannot meet your payments, NHG pays them for you – and becomes your creditor for this amount. The advantage to this system for the mortgage provider is that they are guaranteed payment, in return for which they offer a reduction in mortgage interest of anywhere between 0.3 and 0.7% (in some cases, even 0.9%).
An NHG mortgage loan can be taken out to a maximum of € 310,000 (2019), or 6% more if you take special measures to reduce energy expenses.
With the following mortgage types you will no longer be allowed to deduct the related mortgage interest from your taxable income. For this reason, they are basically no longer offered. If you already have one of these mortgages and lower your mortgage interest, or change mortgage providers, you can keep it – including the deduction. These mortgages are:
Endowment mortgage: No repayments are made during the term of the mortgage. Instead, the whole loan is redeemed in a single lump sum at the end of the term.
Special endowment mortgage (Spaarhypotheek): This is a variation on the Endowment Mortgage. It too provides for a lump-sum redemption of the mortgage loan at the end of the term, with an interest rate on the loan equal to the gross rate of return on the investment under the endowment policy.
Banksparen mortgage (SEW): A special savings or investment account is linked to the mortgage, and the savings must be used for paying off the mortgage.
Interest-only mortgage: No redemptions take place during the term of the mortgage. It is usually part of an ordinary Endowment Mortgage.
‘To determine the most appropriate type of mortgage for you, it is necessary to first consider your tax status’
Dutch Tax Issues For Expatriates
In essence, a mortgage is a tax-driven product. Hence, to determine the most appropriate type of mortgage for you, it is necessary to first consider your tax status. In the Netherlands, the two major tax issues with which an expatriate is faced are the 30%-ruling and the choice between resident (binnenlands belastingplichtige) and partial non-resident tax status (partieel buitenlands belastingplichtige).
Simply put, the 30%-ruling allows an employer to grant an employee a tax-free allowance of up to 30% of his total remuneration to cover expenses related to his placement abroad that he would not have had had he not been sent abroad – such as, for instance, housing-related expenses. Your total gross remuneration is reduced by 30% and in return you receive a 30% tax-free allowance. The result of the 30%-ruling is a higher net salary. When applying for the 30%-ruling, the employee may choose to have resident or partial non-resident tax status, see the following paragraph.
Partial Non-Resident Tax Status
Expatriates who are partial non-residents owe taxes on income derived from certain sources specifically stated in the Dutch income tax legislation.
Partial non-residents are also entitled to tax deductions insofar as they relate to specific income sources, alimony payments and mortgage interest payments for their principal place of residence.
A final important observation regarding partial non-residents is that, contrary to resident taxpayers, their net wealth (i.e. assets minus liabilities, taxed in box 3, over a ‘fictitious’ yield, at 30%) is not taxed here. Hence, the ideal mortgage for a partial non-resident takes advantage of the fact that the interest payments on the mortgage are tax-deductible and that the investment income is not taxed. The corresponding mortgage is discussed further on.
Resident Tax Status
Unless an expatriate chooses to be treated as a partial non-resident taxpayer, he is viewed as a resident for Dutch tax purposes. He is then taxed just as any ordinary Dutch citizen. Resident taxpayers (as well as partial non-resident taxpayers) are only entitled to mortgage interest relief on the principal place of residence. The value of every other residence is subject to wealth tax (over, in principle, the fair market value of the property minus the mortgage loan – over a fictitious yield, at a rate of 30%). Whether this also applies to a house abroad depends on whether this is dealt with in a tax treaty between the Netherlands and the country in which the house is situated.
Expatriates: What Mortgages Are Appropriate?
The recommended mortgage depends on your special tax position and whether you are likely to move again.
The ordinary and the Special Endowment Mortgage are not appropriate for a number of reasons. This has to do with the likely duration of your stay. If you leave within, say, seven years and upon leaving decide to surrender the endowment policy, you may receive back only the total of premiums paid. The reason why there will be hardly any investment return is that insurance companies write off all policy costs during the first years of the insurance. Hence, if you surrender within this write-off period, the investment return will only be marginal.
Most expats opt to pay off the mortgage amount (either through an annuity or straight line mortgage), or to accrue the related amount on a savings account – on a special ‘Own Home Bank Savings Account’, or SEW, see earlier on – and sometimes they opt for an investment mortgage (investment account linked to a mortgage). The redemption-free mortgage is also a reasonably popular option. Generally speaking, mortgages that are linked to insurances are no longer taken out, especially not by expats.
You Are a Resident Taxpayer
If you are benefiting from the 30%-ruling, this will mean that you have a high net salary. This will enable you to make repayments. At the same time, income from wealth is tax-free. For that reason, barring special circumstances, repaying the loan will usually not be tax-efficient.
You Are a Partial Non-Resident Taxpayer
In this case you need to find a mortgage which allows you to benefit from the tax-deductibility of the interest payments while at the same time allowing you to benefit from the tax-exempt investment income (since there is no ‘wealth / box 3’ tax for partial non-resident taxpayers). A special type of mortgage can be found, allowing you to fully benefit from these advantages: a redemption-free mortgage combined with a compulsory savings scheme. Since there are no repayments, you benefit to the full from the tax-deductibility of the interest payments.
And since the investment income on the savings scheme is not taxed, you can use this to generate capital with which all or part of the mortgage can be repaid once your partial non-resident tax status ceases to apply. Because the savings are not taxed, it is better to save than to make repayments: the after-tax effect of the repayments will usually be lower than the tax-free effect of the savings. It follows that it is advisable to borrow as much as possible provided that it can be demonstrated that the funds are used for the acquisition of immovable property in the Netherlands. Finally, as partial non-resident taxpayers benefit from the 30%-ruling; here too this allows you to make savings.
Special provisions apply to U.S. taxpayers; these are not covered here, but can be discussed with your tax advisor.