Annuity Mortgage

An annuity mortgage is a popular type of mortgage where you pay the same gross amount every month during the term — as long as the interest rate does not change. That fixed monthly payment consists of two parts: interest and repayment. The balance between the two gradually shifts.

How does it work?

Initial phase: You mainly pay interest and little repayment. As a result, your mortgage debt decreases slowly.

Final phase: You pay less interest and more repayment. Your debt then decreases faster.

Monthly costs: Gross amount stays the same, but net (after tax benefits) they slowly increase, because you have less mortgage interest deduction as you repay more.

Example

Suppose you have a mortgage of €250,000 with a term of 30 years and an interest rate of 4.5%:

After 5 years you have repaid about 9% of your debt.

After 10 years: 20%

After 15 years: 33% You can see: repayment accelerates as you progress further into the term.

Advantages

Fixed monthly costs: Useful for budgeting.

Full repayment: After 30 years your mortgage is fully repaid.

Disadvantages

Net monthly costs increase: Due to decreasing mortgage interest deduction.

Slow repayment at the beginning: You only start building real equity later.