Mortgage interest relief explained: how does it work?

Mortgage interest relief: you keep hearing about it in the news. The housing market is unpredictable, and it seems as if a group of buyers is hitting the brakes because of the uncertainty around this mortgage interest relief. But I have the feeling that not everyone realises how it works and what influence it has. In any case, they are not abolishing mortgage interest relief completely in one go, but phasing it out further. So no reason to panic.

Contents

• What is mortgage interest relief?
• The figures: who actually benefits?
• Developments and legislative proposals
• Influence on the housing market
• Who are the winners and losers
• International perspective
• So what does this mean for the housing market now?
• Conclusion

Mortgage interest relief (hypotheekrenteaftrek) is a term almost every homeowner has heard of. It sounds like a gift from the Belastingdienst (the Dutch tax authority): you may deduct the interest you pay on your mortgage from your income, so you pay less income tax. Very nice, especially with today's high monthly payments. But how exactly does it work, what is the eigenwoningforfait you always hear about too, and what influence does this scheme have on the housing market? In this blog we explain what mortgage interest relief involves. We discuss how it works, the latest developments and proposals, and what it all means for the housing market and for you as a (future) homeowner.

What is mortgage interest relief?

Put simply, mortgage interest relief means that homeowners may deduct the mortgage interest they have paid from their taxable income. As a result, they pay less tax. It was introduced long ago to encourage people to buy their own home. For a long time, you could simply deduct all the interest paid at your highest tax rate. For someone in the highest tax bracket (52% at the time), that meant the tax authorities paid back half of your mortgage interest. That was pretty relaxed. Especially when interest rates were still really high.

Set against that relief is the eigenwoningforfait (the notional rental value of your home). An addition to your income. This is an amount that is added to your income if you own your home. The eigenwoningforfait is a kind of notional income from living in your home. They see it as a benefit of owning a house. It is a percentage of your home's WOZ value (the municipal property valuation). For most homes, it has been set at 0.35% of the WOZ value in 2024 and 2025. For an average home of €461,000, that means around €1,614 of extra taxable income. In cities like Utrecht, where the average WOZ value is €450,000, that is a good €1,575 a year. You pay tax on that notional amount, unless you pay enough mortgage interest to offset it.

On top of that, there is the so-called villa tax (the ‘villataks’): for homes with a WOZ value above approx. €1.3 million, a higher eigenwoningforfait percentage is charged. This means expensive houses are taxed more heavily, so the tax deduction for that group is effectively already limited further. As far as I'm concerned, the politicians who keep going on about a villa subsidy are talking nonsense. It is precisely first-time buyers who benefit from mortgage interest relief. And the people with the biggest mortgages are certainly not the villa owners, but rather the people in apartments, terraced houses, end-of-terrace houses and semi-detached homes.

The figures: who actually benefits?

According to CBS data (2023):

• Number of owner-occupied homes: 4.58 million (56.8% of all homes).
• Average home value: €461,000 (Utrecht: WOZ value €450,000 and average home value €513,500).
• Average mortgage: €171,000, or just 37% of the home's value. So on average there is 63% home equity.
• Mortgage-free: almost 800,000 homes (17.4%).
• Debt ratio: only 4.4% of homeowners have a mortgage above 90% of the home's value. The average mortgage amount is only 1.4 times gross income.

Mortgage interest relief cost the government about €9.3 billion in 2023. Per household with a mortgage, that is an average of €2,457 a year (€205 a month). In 2025 it is approx. €11 billion, and if you subtract the eigenwoningforfait, only approx. €7 billion. But 70% of homeowners get hardly any benefit, because their mortgage is low or paid off. So the tax benefit goes mainly to the 30% with higher mortgages; first-time buyers and homeowners with interest-only loans (from before 2001) benefit the most. These days you can no longer deduct the interest on an interest-only loan. And you may only deduct for 30 years. But the tax authorities have not registered this properly.

In Utrecht, with 167,124 homes of which 44% are owner-occupied, the importance of interest relief is slightly different: many homes are highly priced, but here too a large share of owners already have substantial home equity. The local discussion therefore often revolves around affordability for new buyers.

Developments and legislative proposals

• Deduction rate reduced: Previously, higher earners could deduct at 52%; nowadays the deduction is capped at 37%.
• 30-year term: From 2031, the first group of homeowners will lose their right to the deduction.
• Proposal to abolish it in steps: From 2029, the deduction would be reduced by 5% every year until it is fully abolished in 2048.

Influence on the housing market

The impact of mortgage interest relief on the housing market has become smaller in recent years. Because the deduction is capped at 37% and many homeowners already have low mortgages (and a low mortgage rate), it pushes prices up less than it used to. Even so, it can become noticeable again when interest rates are high: it lowers net monthly payments and can slightly increase borrowing capacity. So other factors are much more important in what drives up prices on the housing market.

In Utrecht and other urban regions, it is mainly the high house price that plays a role, not so much the deduction itself. Most buyers look at their gross housing cost ratio and monthly payments. The interest relief is a ‘bonus’, but it no longer determines the whole decision to buy.

Who are the winners and losers

• First-time buyers and people with large mortgages: benefit the most.
• Homeowners with a small mortgage or none: hardly at all.
• Tenants: not at all, even though they do help pay for it through taxes.

International perspective

In countries such as Finland, Sweden and Denmark, the deduction has been (largely) abolished. There it led to a temporary cooling of the housing market, but after that prices stabilised and home ownership stayed high. The United Kingdom abolished mortgage interest relief completely in the late ’90s without the housing market collapsing. The main effect was that price growth slowed and debt ratios fell. This shows that the Dutch housing market probably won't collapse if the relief is phased out further, although it could cause a brief fall in prices or, as I think more likely, a stabilisation.

So what does this mean for the housing market now?

The housing market seems to be cautiously stabilising, which gives less reason for panic. A few developments support this optimism:

• Slowing price rises: After the extreme price rises of 20% or more in 2021, house price growth has flattened out considerably. Over the past year, house prices were only around 4% higher than a year earlier. This means the market is clearly cooling compared with the overheated situation of a few years ago. But the market is still overheated. Though things are stabilising a bit more.
• More supply and transactions: There are considerably more homes for sale these days, and more houses are being sold too. In 2024, for example, 38,000 more homes were put up for sale than in 2023, partly because investors are selling off their rental properties en masse. The number of home sales has also increased; in the autumn of 2024 it was almost 19% higher than a year earlier. A larger supply and higher sales numbers are visibly easing the pressure on prices. In Utrecht in August we had 29.8% more transactions and 50.6% more supply.
• Supply and demand coming into better balance: Because of the increased supply and higher mortgage rates, demand from buyers has weakened somewhat, although it is certainly still there. At the same time, too little is still being built to solve the housing shortage completely. New construction is lagging behind what is needed: few building permits are being issued (and when they are, building often isn't viable), and the supply of houses with their own land is falling. This leads to a mismatch between supply, affordability and buyers' needs. The rental market is also very tight: almost 30% fewer rental homes have become available because many rental houses are being sold. Not all tenants can buy straight away, which increases the pressure on the rental market. The slightly reduced demand from buyers, combined with more supply, means the market is less overheated than before.
• Gradual phasing-out of mortgage interest relief: Mortgage interest relief (the tax benefit on mortgage interest) has been reduced step by step for years and has now been brought down from 52% to around 37%. This gradual phasing-out has so far not caused a major shock on the housing market. Because the phasing-out is spread over many years (often 15–20 years), monthly payments rise only very gradually, think a few tens of euros extra per month each year. For most homeowners this is easy to absorb, all the more so because wages and incomes have risen sharply recently. Someone's salary often grows faster than their mortgage costs, so each year people spend relatively less of their income on the mortgage.
• First-time buyers build up financial capacity: First-time buyers on the housing market start earning more over time, which helps absorb the loss of the tax benefit. In addition, many existing homeowners are still benefiting from the historically low interest rates of recent years, so the effect of less interest relief remains limited. For new mortgages the interest rate is higher (around 4%), but on the other hand, with annuity loans the interest costs fall over the term. With an annuity mortgage, the tax benefit on the interest decreases. Proportionally, you pay less and less interest and so, proportionally, you also get less and less deduction. You repay more and more and pay less and less interest. This means that the longer the mortgage runs, the less the loss of interest relief hurts.
• Getting the most out of it with a linear mortgage: Anyone who still wants to get the most out of the existing mortgage interest relief could consider choosing a linear mortgage. With a linear mortgage you pay higher monthly payments in the first years, with relatively a lot of interest, and as a result you initially enjoy more tax benefit. Over time the debt falls, and with it the interest, so the deduction benefit automatically becomes smaller. So with a linear loan you use the interest relief mainly in the early years, precisely the period in which this tax support is still available anyway. This can be attractive for some buyers now that the relief scheme threatens to be phased out further in the future.

Conclusion

Mortgage interest relief has less effect on the housing market these days than it used to, but it remains an important factor in the net housing costs of some households. For the majority of homeowners and all tenants, the benefit is minimal. With the high home equity and low average debt ratios in the Netherlands, a gradual phasing-out is logical and manageable. National and local figures, such as Utrecht's, show that the discussion is mainly relevant for new buyers with large loans and less so for the majority of homeowners who have already paid off most of their mortgage. Don't let these developments hold you back. The pressure remains high and little is being built. I expect prices to keep rising, but less sharply. Take advantage of the uncertainty before the rise picks up again.