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Housing prices have risen significantly in recent years, leaving many homeowners with equity. This means your home is worth more than your outstanding mortgage. But how can you best use this equity? Below, we discuss some options.
1. Calculating Your Equity
To calculate your equity, subtract the remaining mortgage balance and selling costs from the sale price of your home.
Example:
Sale price: €403,500
Selling costs: €3,500
Remaining mortgage: €150,000
Calculation:
€403,500 (sale price) - €3,500 (selling costs) - €150,000 (mortgage) = €250,000 equity
2. The Home Equity Rule (“Bijleenregeling”)
If you purchase a new home within three years of selling your current home, the home equity rule applies. This rule requires you to use the equity to finance your new home. If you don’t, you will lose the right to deduct mortgage interest on the portion of your new mortgage equal to the equity.
3. Using Equity for a New Home
Using the equity from your old home to purchase a new one reduces the amount you need to borrow.
Example:
Purchase price of the new home: €400,000
Equity from the old home: €250,000
Calculation:
€400,000 (purchase price) - €250,000 (equity) = €150,000 new mortgage
Your new mortgage will be €150,000, and you can deduct mortgage interest on this amount.
4. Buying a Cheaper Home
If you buy a cheaper home than your current one, you must still use the equity within three years for the new home. This results in a smaller mortgage and lower monthly payments. If your equity exceeds the purchase price of the new home, the remaining amount will be held as a “home equity reserve” for three years. If you buy another property within this period, you must use this reserve.
5. Gifting Equity to Your Children
You can gift part of your equity tax-free to your children, provided they use it to purchase their own home. In 2024, it is possible to gift up to €103,643 tax-free for a home. Note that the conditions may change annually.
6. Moving in Together
If you and your partner both have equity from the sale of your homes, the home equity rule requires both amounts to be used to finance your joint new property. The rules for this can be complex, so consulting a mortgage advisor is advisable.
7. Moving to a Rental Property or Moving in With a Partner
If you don’t buy a new home after selling your property, for example, if you rent or move in with a partner, the equity will remain as a “home equity reserve” for three years. After this period, you can use the equity freely. However, keep in mind that this may affect your wealth tax.
Conclusion
The equity from your home provides various opportunities, such as reducing your new mortgage, gifting to your children, or creating financial flexibility. It’s essential to consider tax rules, such as the home equity rule, and seek advice to determine the best option for your situation.
