Housing Affordability; it’s the catch-cry of the year. It seems we can’t go a day without hearing the words, especially when used in conjunction with the other latest slogan; “mortgage stress”. Even politicians have entered the discussion with the idea of making the interest repayments on first home-buyer’s mortgages tax deductible to try and ease this affordability crisis.
In the United States, interest repayments are tax deductible on owner-occupied loans. Currently in Australia however, only the interest repayments on investment properties can be used as a tax break. It would appear that our current system favours those with the capital to invest but if we were to adopt tax deductible repayments for first home buyers to try and even the playing field; how much could they save?
A home mortgage interest deduction allows taxpayers who own their homes to reduce their taxable income by the interest paid on the loan which is secured by their principal residence (or, sometimes, a second home). Most developed countries do not allow a deduction for interest on personal loans, so countries that allow a home mortgage interest deduction have created an exception to those rules. The Netherlands, Sweden, Switzerland, and the United States each allow the deduction. The standard justification for the deduction is that it encourages home ownership. Countries that tax imputed income on home ownership may allow the deduction under the theory that it is no longer a personal loan, but a loan for income-producing purposes. Standard criticisms are that it does not significantly impact home ownership, that it allows taxpayers to circumvent the general rule that interest on personal loans is not deductible, and that the deduction disproportionately favors high-income earners.