Paying deductible (mortgage) interest on your own home in advance can give you a tax benefit. However, your bank is not obliged to cooperate.
Kifid ruling
Kifid stated this in a recent ruling confirmed. Kifid is the Financial Services Complaints Institute. Kifid considers the terms agreed with your bank to be decisive. The case concerns a customer of ING Bank who took out a mortgage loan in 2017. The customer agreed with the bank that the interest would be paid monthly in arrears by direct debit.
ING, like most other banks, refuses to comply with a request to pay interest six months in advance. Given the agreements that have been made, it is not obliged to do so. Furthermore, Kifid does not consider it relevant that the bank did grant such requests in the past. Nor is it unreasonable or unfair for the bank to refuse to assist its customer in obtaining a tax benefit.
Tax benefit
Prepaid (mortgage) interest, which is deductible as interest on your own home, may be deducted from your income from work and home (Box 1). This is subject to the condition that the prepaid interest relates to a period ending before 1 July of the following year. In 2019, you may deduct prepaid interest if it relates to the period up to and including 30 June 2020. PLEASE NOTE: if you pay interest in advance for a longer period, your right to deduct it in the year of prepayment lapses entirely.
Deducting prepaid interest means you’ll get your tax back sooner. This gives you an interest benefit. Greater benefits can be achieved by (partially) avoiding the phased reduction in the deduction rate. In 2019, interest on your own home still yields a maximum tax benefit of 49%. You will then be taxed at the highest tax band. This applies insofar as your income from employment and property, excluding the interest deduction, exceeds (approximately) €68,500. The tax rate decreases to 37,05% in 2023. In 2020, 2021 and 2022, the deduction rate is: 46%, 43% and 40%.
A tax advantage can also be achieved by using a combination of advance and retrospective payments to avoid the so-called Hillen deduction. Furthermore, making advance payments in the event of an impending death can yield a tax benefit. The same applies where it is anticipated that a loan will be transferred from Box 1 to Box 3.
It is essential for the deduction of prepaid (mortgage) interest that you formally agree this with the bank. If you do not do so, the tax authorities will regard your prepayment as a deposit. You will then not be entitled to a deduction. As confirmed by the Kifid ruling, this condition is often where the problem lies. If you borrow from your own private limited company or from a family member, this will not be an issue. Even in such cases, it is important to document the advance payment properly.