If you locked in a 1.2% mortgage rate in 2021 and you’re still throwing extra money at your hypotheek (mortgage) every month, the numbers show you’re likely making a costly mistake. With savings accounts now paying 1.9% and the new Box 3 (wealth tax box) system set to tax your assets harder than ever, the old advice to “pay down debt fast” needs a serious Dutch reality check.
The Simple Math That Exposes the Flaw
Let’s start with basic arithmetic. Your mortgage costs you 1.2% annually. If you pay down an extra €10,000, you save €120 in interest per year. Sounds reasonable, until you realize that same €10,000 parked in a standard savings account earns you €190 per year at current rates.
That’s a €70 annual loss for every €10,000 you prepay. Scale that up, and the difference becomes substantial. A homeowner with €50,000 in extra savings would lose €350 per year by using it for early mortgage repayment instead of keeping it liquid.
The situation becomes even more lopsided when you factor in the new Box 3 tax system. Starting in 2028, the Netherlands will tax actual investment returns at rates up to 36% for higher wealth brackets. While this hits stocks and bonds hard, it also means the Belastingdienst (Tax Authority) will scrutinize your wealth-building strategies more closely than ever. how the 2028 Box 3 reforms tax unrealized investment gains
The Hidden Tax Penalty of Paying Down Your Mortgage
Many homeowners forget that extra mortgage payments trigger a double tax penalty. When you pay down your hypotheek (mortgage), you reduce your hypotheekrenteaftrek (mortgage interest deduction). For someone in the 37% tax bracket, that means each €120 of interest saved actually costs you €44.40 in lost tax benefits.
Simultaneously, your eigenwoningforfait (homeownership imputed income tax) remains based on your home’s WOZ-value (official property valuation), not your mortgage balance. So you pay the same tax on your property while losing deductions. The effective return on your extra payment drops from 1.2% to roughly 0.75% after accounting for lost tax benefits.
One financial planner calculated that for a typical Dutch homeowner, the real return on extra mortgage payments can sink as low as 0.8% annually after these tax effects. At that point, even stuffing cash under your mattress starts looking competitive.
When Psychology Trumps Mathematics
Despite the numbers, some situations justify extra payments. If you lie awake at night worrying about debt, the rust in je hoofd (peace of mind) might be worth the financial trade-off. Psychological comfort has value, even if it doesn’t show up in spreadsheets.
Another scenario: you plan to buy a more expensive house within five years. Extra payments now increase your overwaarde (home equity), which banks look at favorably when sizing your next hypotheek (mortgage). In a cooling housing market, having more equity can be the difference between securing your dream home and watching it slip away.
The regulatory landscape also matters. The Autoriteit Financiële Markten (AFM) and De Nederlandsche Bank (DNB) have pressured banks to reduce aflossingsvrije hypotheken (interest-only mortgages). If you have one, building equity now might be prudent. Banks increasingly limit these products to 30% of a property’s value, with a €150,000 cap at major lenders like Rabobank starting May 2026.
The Box 3 Wealth Tax Game-Changer
Here’s where Dutch tax policy flips conventional wisdom upside down. The new Box 3 system taxes your net wealth above roughly €57,000 per person (2026 threshold). Savings interest barely covers inflation, but the taxman will still take a slice.
Paradoxically, this makes mortgage debt more attractive. Money tied up in your home is shielded from Box 3 taxation, while cash in the bank is exposed. Some advisors now suggest using mortgage debt strategically to reduce Box 3 tax exposure.
Consider this: €100,000 in savings might generate €1,900 interest but face Box 3 tax of several hundred euros. That same €100,000 used to reduce a 1.2% mortgage saves you €1,200 in interest, tax-free. The math suddenly looks different when viewed through the lens of total tax burden.
However, this strategy requires careful timing. The coalition agreement hints at future changes, and the out of the box denken (out-of-the-box thinking) solutions like buying oldtimers or art collections mentioned in some tax articles carry their own risks.
The 10% Rule and Future Rate Risk
Most Dutch mortgage contracts allow only 10% extra repayment per year without penalties. Exceed this, and you might face boeterente (prepayment penalties) that wipe out any financial benefit. Check your contract before making large lump-sum payments.
The strongest argument for extra payments is future interest rate risk. Your 1.2% rate is fixed for 20 years, but what happens after? If rates return to historical norms of 4-5%, having a smaller remaining balance will reduce the payment shock.
Yet even here, alternatives exist. Instead of paying down your mortgage, you could build a dedicated investment portfolio designed to match or exceed future mortgage rates. Comparing investment vehicles under the new Box 3 tax regime shows that while the new tax system reduces net returns, diversified strategies still typically outperform 1.2% over 15+ year periods.
Practical Strategies for 2026
Do nothing and save: For most people with rates below 2%, the optimal strategy is making regular payments and building liquid savings. Keep your geld (money) accessible for opportunities or emergencies.
Wait and lump-sum: Save aggressively now, then make a large repayment when your fixed-rate period ends. This avoids the 10% annual limit and gives you flexibility if rates drop further.
Box 1 optimization: Consider lijfrente (annuity/pension) contributions or home improvements. These reduce your taxable income in Box 1 while building wealth in tax-advantaged ways. Under the new Box 3 rules, alternative strategies like the Beleggings BV (investment private limited company) might also become attractive for larger portfolios.
The hybrid approach: Make minimal extra payments, just enough to create psychological comfort, while directing most surplus cash to diversified investments or savings. This balances peace of mind with financial optimization.
The Bottom Line
For a 1.2% mortgage holder in 2026, pure mathematics says extra payments are a losing proposition. You earn more in savings accounts, lose tax benefits, and sacrifice liquidity. The new Box 3 wealth tax actually strengthens this argument by making liquid assets more expensive to hold.
However, individual circumstances matter. If you’re risk-averse, planning a home upgrade soon, or sitting on an aflossingsvrije hypotheek (interest-only mortgage) that regulators want eliminated, strategic extra payments can make sense.
The key is running your own numbers. Calculate your true after-tax return on extra payments (likely under 1%). Compare that to alternatives: savings rates, expected investment returns minus Box 3 tax, and the value of keeping cash accessible. The cost of delaying investment due to low mortgage rates compounds over time.
For most Dutch homeowners, the old advice is dead. In the new world of higher savings rates and aggressive wealth taxation, your 1.2% mortgage might be the cheapest money you’ll ever borrow. Treat it accordingly.
