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Residual debt financing Revolving credit

11-09-2015

When financing a residual debt, the interest is tax deductible for a maximum period of 15 years, subject to conditions. Financing a residual debt can be done in various ways: via the new mortgage lender, a personal loan or a revolving credit. Financing a residual debt by means of a Revolving Credit has advantages and disadvantages. We would like to list these advantages and disadvantages for you.

Benefits:

• The interest on a Revolving Credit is often lower than the interest on a Personal Loan (If you choose a repayment percentage of 1%, the monthly charge for a Revolving Credit will be slightly lower);
• Interim (partial) repayment is always penalty-free;
• It is common practice in the market to determine the interest rate of the credit based on your customer's risk assessment. With a Revolving Credit, this assessment has no influence on the monthly term of the credit, this remains a fixed percentage of the credit limit (eg 1%). As the interest rate increases, the term of the credit increases. With a personal loan, the term is fixed and the higher the interest, the higher the monthly costs will be. It is not always possible to opt for a Personal Loan with a longer term. This advantage of a Revolving Credit can also be a disadvantage for the customer.

  Cons:

• The interest on a Revolving Credit is variable. That means that the interest can be lower, but also higher. If the interest rate increases, it will often mean that the term is longer. Your customer will then have repaid the residual debt later than planned. In some situations the term can be longer than 15 years. This has no consequences for the deductibility of the interest within the period of 15 years. It does mean that the interest on the remaining residual debt is no longer deductible after 15 years.
  NB With an initial interest higher than 9.1% and a redemption rate of 1%, the theoretical term is longer than 15 years.
• Some lenders test a residual debt against actual expenses for a new mortgage with a maximum term of 15 years. The term of a Revolving Credit can be longer than 15 years. In that case, the expenses will be tested at 2% per month instead of actual expenses.
• The characteristic of a Revolving Credit is that withdrawals can be made. With additional withdrawals, it becomes difficult for your customer to determine which part of the interest can be taken into account as deductible interest. That is why we recommend having a permanent withdrawal block placed on the credit with a residual debt financing. This ensures that the customer does not have to make a difficult calculation of the deductible interest. Sometimes a withdrawal block is even a requirement of the mortgage lender to be able to finance the residual debt in addition to a mortgage.

Before taking out a Continuous Credit, your personal and financial situation is taken into account. For the budgeting of a residual debt that is financed by means of a Revolving Credit, the Consumer Credit Code of Conduct is taken into account.

If you would like more information or request a quote, please contact us.