Ask RiotACT: Call for mortgage payments to become tax deductible?

Mordd / Chris Richards said :

dungfungus said :

The same way that I was able to afford to buy my first house on a single and not a high income. Buy the cheapest house on the market in all Canberra and rent out the spare rooms. This is best done before having children, say in your twenties.

Fine theory, but limited to single people. What about families? They are stuck paying minimum $360/week for 3 bedrooms, whilst the same properties can be purchased with loan repayments of $320/week. The only difference between the single person an the family is the bank’s calculations that exclude the family from borrowing because of their living expenses, yet they are expected to pay far more for renting. How is that fair?
A frugal twenty something also has to pay rent while they save the deposit for their first home. Unless Mommy and Daddy are going to house them and they have a steady job, the ol’ catch 22 of saving a deposit whilst paying exorbitant rent traps them in the same cycle that prevents them getting a foot in the market. This is why the first home buyers grant was a Godsend, enabling those who can maintain a loan but unable to save a deposit, to purchase their first property and lessen the cost of accommodation.
The biggest, craziest problem with the housing market is that rents are more expensive than mortgage repayments. So many people could be paying off their own home but for one thing, banks’ unwillingness to lend to these people without huge deposits. So they get stuck in the rental cycle, as we ourselves did for many, many years, throwing money into somebody else’ mortgage.

Rents are more expensive than mortgage repayments because investors don’t want to lose money on their asset. There are also other costs that are factored in such as rates, strata and insurance. While rents may seem high, the current state of play is that unless someone is well ahead on their mortgage, the property will likely be negatively geared.
Renting also insulates you better against the market fluctuations. Anyone who bought at the peak of the market 4 years ago and now looking to sell can stand to lose 5-7% on home value. For a 450K house, that’s an extra $150/week which if not factored in, will affect the buyer’s borrowing potential for the next property.

By all means, rent all the way to the bottom. You’ll be in a better position than the owner occupiers out there.

Mordd / Chris Richards said :

That just sounds like yet another avenue for rich people to evade tax. For example, say you earn $400K
Step 1: Buy a 600K house and live in it.
Step 2: Pay off mortgage in 3 years. Tax deduct $200K/year, save $90K in tax
Step 3. Sell for market value or keep as a rental.
Step 4. PROFIT.

Any form of tax deduction will provide the greatest benefit to the top end of the market, who arguably are the people we least need to support with respect to housing affordability.

I can also imagine a policy like this having massive tax revenue ramifications, given the number of mortgages out there + the value of repayments as a % of income.

In my opinion we should prioritise the use of houses as homes rather than tax havens.

A more equitable way to support people struggling to pay off their mortgage would be to apply a one off or recurring grant of fixed value (adjusted for the average mortgage amount and interest rate) to eligible mortgagees.

I assume the example here is that the mortgage loan is for whatever 3 years x $200K less interest is?
My calculations would give that as meaning the principal would be about $560,000 with the interest being about $40,000 (over the 3 year loan term) so your suggestion of a huge annual tax deduction just went up in smoke.
With logic like that you will never have to worry about getting rich.

Well my outlandish assumption was that OP was suggesting that all loan repayments (principal + interest) would be tax deductible, in which case you may as well go the whole hog and make all property expenses deductible, as is the case for investment properties.

My point still stands, given the proportion of income that most people spend on property, you would have greatly reduced government tax revenue, plus more ways for the rich to save more than the poor.

dungfungus said :

The same way that I was able to afford to buy my first house on a single and not a high income. Buy the cheapest house on the market in all Canberra and rent out the spare rooms. This is best done before having children, say in your twenties.

Fine theory, but limited to single people. What about families? They are stuck paying minimum $360/week for 3 bedrooms, whilst the same properties can be purchased with loan repayments of $320/week. The only difference between the single person an the family is the bank’s calculations that exclude the family from borrowing because of their living expenses, yet they are expected to pay far more for renting. How is that fair?
A frugal twenty something also has to pay rent while they save the deposit for their first home. Unless Mommy and Daddy are going to house them and they have a steady job, the ol’ catch 22 of saving a deposit whilst paying exorbitant rent traps them in the same cycle that prevents them getting a foot in the market. This is why the first home buyers grant was a Godsend, enabling those who can maintain a loan but unable to save a deposit, to purchase their first property and lessen the cost of accommodation.
The biggest, craziest problem with the housing market is that rents are more expensive than mortgage repayments. So many people could be paying off their own home but for one thing, banks’ unwillingness to lend to these people without huge deposits. So they get stuck in the rental cycle, as we ourselves did for many, many years, throwing money into somebody else’ mortgage.

BombaySapphire said :

I’m all for this idea. Anything to ease the burden of living is a good thing. With all the new housing available in Canberra, the prices don’t seem to have dropped at all so how else are they going to be affordable for first home buyers? If you reduce the prices by preventing investment properties from being so easily obtainable, it will only hurt the current owners and would be investors. There is little that would drop the price of housing in Canberra, when the land itself is most of the cost. The government won’t reduce land values or they lose their income through rates. What else can we do but try and subsidize things?

House prices are dropping at the moment in Canberra. (hence investigating whether we can buy or not).

BombaySapphire said :

I’m all for this idea. Anything to ease the burden of living is a good thing. With all the new housing available in Canberra, the prices don’t seem to have dropped at all so how else are they going to be affordable for first home buyers?

The same way that I was able to afford to buy my first house on a single and not a high income. Buy the cheapest house on the market in all Canberra and rent out the spare rooms. This is best done before having children, say in your twenties. Also grow as much food as you can and mend your clothes, and the mends on your clothes. Plus don’t eat out at restaurants and no overseas holidays for a few years. In other words, live very frugally. If this is too boring and arduous for you, you don’t want to buy your own home strongly enough. In that case, fair enough, rent; that’s your choice.
You don’t need to live your whole life like this; only for a few years, as you pay off your loan and pour any spare money you have into extra loan repayments. From believing I would struggle to have a home loan; with tenants and living very frugally, I actually managed to pay off my mortgage in only a few years. You can also claim, proportionally, expenses and loan interest on tax.

I’m all for this idea. Anything to ease the burden of living is a good thing. With all the new housing available in Canberra, the prices don’t seem to have dropped at all so how else are they going to be affordable for first home buyers? If you reduce the prices by preventing investment properties from being so easily obtainable, it will only hurt the current owners and would be investors. There is little that would drop the price of housing in Canberra, when the land itself is most of the cost. The government won’t reduce land values or they lose their income through rates. What else can we do but try and subsidize things?

This might be nice for people who have managed to buy into the property market, but for those who are still on the outside, it would likely just add further to already high prices – in the same way as falling interest rates have.

The only realistic prospects for more affordable home prices are policies which reduce demand from investors/speculators, measures which make it less attractive for people who aren’t Australian citizens or permanent residents to park money in Australian residential real estate, and an increase in the supply of housing which is attractive to owner buyers (rather than to would-be landlords).

gazket said :

It’s a no from me.
It skews the market towards owners even more and massively disadvantages renters again. .

Generally speaking it’s gathering the deposit that is the issue and Lender’s mortagae insurance. For a $300,000 -$500,000 you still need a deposit of $ 30,000 – 50,000 regardless of affordability and that will still have a LMI of $10,000-15,000.

Any reform into the improving accessibility to home buying should be around the deposits – generally speaking if you can afford a rental you can afford a mortgage.

Surely before we go interfering in banks’ risk management practices, we should get rid of the stamp duty, which is as much of a burden, a dead-weight loss on society, reduces the liquidity of the housing market and doesn’t reduce the loan principal?

Agree on the stamp duty.
Banks already do their risk management on loans before LMI. LMI has a extremely low claim rate (3% of all hardship cases)
LMI is a specifically useless insurance for the banks that is in addition to all the other insurances that they have

gazket said :

It’s a no from me.
It skews the market towards owners even more and massively disadvantages renters again. .

Generally speaking it’s gathering the deposit that is the issue and Lender’s mortagae insurance. For a $300,000 -$500,000 you still need a deposit of $ 30,000 – 50,000 regardless of affordability and that will still have a LMI of $10,000-15,000.

Any reform into the improving accessibility to home buying should be around the deposits – generally speaking if you can afford a rental you can afford a mortgage.

Surely before we go interfering in banks’ risk management practices, we should get rid of the stamp duty, which is as much of a burden, a dead-weight loss on society, reduces the liquidity of the housing market and doesn’t reduce the loan principal?

Good point but then you have to replace the income which IIRC is about 10% of the States’ income. ACT government went down that route and the easily-outraged set started shaking their fist at the moon and howling. We don’t need that again.

The Howard government as part of introducing the GST promised that they would pay the states enough to eliminate stamp duty then promptly forgot about it as they went on their drunken sailor spending spree as they blew the extra income as well as the mining bloom income. It’s all gone now though, bye bye opportunity.

If they had better managed the money (have a look what Canada did with their mining boom revenue) they could have payed more money to the States to compensate for reduced revenue from abolishing stamp duty.

Hopefully my kids kids will have a better government that doesn’t blow it when they tgat a golden opportunity to

gazket said :

It’s a no from me.
It skews the market towards owners even more and massively disadvantages renters again. .

Generally speaking it’s gathering the deposit that is the issue and Lender’s mortagae insurance. For a $300,000 -$500,000 you still need a deposit of $ 30,000 – 50,000 regardless of affordability and that will still have a LMI of $10,000-15,000.

Any reform into the improving accessibility to home buying should be around the deposits – generally speaking if you can afford a rental you can afford a mortgage.

Surely before we go interfering in banks’ risk management practices, we should get rid of the stamp duty, which is as much of a burden, a dead-weight loss on society, reduces the liquidity of the housing market and doesn’t reduce the loan principal?

It’s a no from me.
It skews the market towards owners even more and massively disadvantages renters again. .

Generally speaking it’s gathering the deposit that is the issue and Lender’s mortagae insurance. For a $300,000 -$500,000 you still need a deposit of $ 30,000 – 50,000 regardless of affordability and that will still have a LMI of $10,000-15,000.

Any reform into the improving accessibility to home buying should be around the deposits – generally speaking if you can afford a rental you can afford a mortgage.

Masquara said :

Bad idea. What you are saying is that the government should subsidize mortgages. All that will happen is:
1) The government will have even less money in the bank
2) House prices will jump by an amount proportional to the subsidized payments, as effectively the cost of carrying a mortgage is reduced across the board for all owners

Exactly.
Any of these schemes to make housing more affordable only end up with mortgages rising to the new level of “Affordability”.

So if you’ve already got a few houses this is a greeat idea, your portfolio value goes through the roof.

It’s a “no” from me.

With my first house I rented out the two spare bedrooms and was able to claim two thirds of my mortgage interest. It also meant I paid off my loan in five years. (I could have paid it off in three and a half years if I hadn’t bought a new car.) I had bought the cheapest house at the time available in all Canberra, so it was the smallest loan possible. That helped too 🙂

Assuming you meant deduct the interest:
1) on one hand, as has been pointed out above, the “rich” would benefit disproportionately because they could buy a bigger house and get a bigger tax reduction.
2) On the other hand, under the current system, there is no legal limit on how many properties you can negatively gear. As long as your income can fund the shortfall, the sky’s the limit. So to that end, this favours the rich even more.
3) Viewed in isolation, house prices would go up. But this could offset, say, tax concessions currently given to investors.
4) This would be consistent with tax treatment in the US. However, it would not be consistent with general Australian approach that tax losses are only offset against income-earning activities. Owning an investment property is (theoretically) about generating income – a house you live in is not.
5) it might be difficult for the tax office to police. How many ‘primary residences’ is one allowed to have? Like any tax concession, it could be gamed.

Best answer is to just stick to normal income quarantining provisions. Property losses can be offset against property gains, provided they’re investments and not to live in. That would leave the general regulatory framework intact and reduce the revenue loss.

dungfungus said :

Horrible idea! The more one can afford to have as a loan (ie the richer you are) the greater the benefit. This would be rich people’s welfare.

Who are these mythical “rich people”?

That just sounds like yet another avenue for rich people to evade tax. For example, say you earn $400K
Step 1: Buy a 600K house and live in it.
Step 2: Pay off mortgage in 3 years. Tax deduct $200K/year, save $90K in tax
Step 3. Sell for market value or keep as a rental.
Step 4. PROFIT.

Any form of tax deduction will provide the greatest benefit to the top end of the market, who arguably are the people we least need to support with respect to housing affordability.

I can also imagine a policy like this having massive tax revenue ramifications, given the number of mortgages out there + the value of repayments as a % of income.

In my opinion we should prioritise the use of houses as homes rather than tax havens.

A more equitable way to support people struggling to pay off their mortgage would be to apply a one off or recurring grant of fixed value (adjusted for the average mortgage amount and interest rate) to eligible mortgagees.

I assume the example here is that the mortgage loan is for whatever 3 years x $200K less interest is?
My calculations would give that as meaning the principal would be about $560,000 with the interest being about $40,000 (over the 3 year loan term) so your suggestion of a huge annual tax deduction just went up in smoke.
With logic like that you will never have to worry about getting rich.

Horrible idea! The more one can afford to have as a loan (ie the richer you are) the greater the benefit. This would be rich people’s welfare.

The Netherlands already do this, though the tax office adds to your income an amount equivalent to the probable rent, before you can claim the interest as a deduction.

About 18% of the population want the scheme scrapped, mostly due to the perception of lost tax income leading to higher taxes elsewhere to raise revenue, and inflationary pressure on property making entry into the market quite difficult. No doubt we will see the Netherlands abandon the experiment within the decade.

Norway allows the same deduction of interest from income regardless of owner-occupier or landlord status. Again, critics claim the scheme costs potential tax dollars and artificially inflates the price of housing, making it harder to enter the market.

The common theme being that negative gearing that can be applied to personal income is a great tax dodge, meaning that government seeking revenue will have to raise or create taxes elsewhere. In addition, making it easier for people with lots of money to make more money means the people who don’t have lots of money end up on the losing side of the class war between rich and poor.

More middle class welfare.

Some more sensible ideas would be using super, though ensuring that what is taken out is repaid. Benifit cuts out the banks and the money ‘saved’ on intrest should then go back into super by paying extra. Doesn’t rely on a government handout.

You would have to remove the capital gains tax exemption for the family home otherwise you’d just be providing an easily scammed system.

I’m also assuming that you’re only talking about deducting interest not repayments but you’d have to look at the effects of this type of policy holistically with the entire tax system not just in isolation.

That just sounds like yet another avenue for rich people to evade tax. For example, say you earn $400K
Step 1: Buy a 600K house and live in it.
Step 2: Pay off mortgage in 3 years. Tax deduct $200K/year, save $90K in tax
Step 3. Sell for market value or keep as a rental.
Step 4. PROFIT.

Any form of tax deduction will provide the greatest benefit to the top end of the market, who arguably are the people we least need to support with respect to housing affordability.

I can also imagine a policy like this having massive tax revenue ramifications, given the number of mortgages out there + the value of repayments as a % of income.

In my opinion we should prioritise the use of houses as homes rather than tax havens.

A more equitable way to support people struggling to pay off their mortgage would be to apply a one off or recurring grant of fixed value (adjusted for the average mortgage amount and interest rate) to eligible mortgagees.

Bad idea. What you are saying is that the government should subsidize mortgages. All that will happen is:
1) The government will have even less money in the bank
2) House prices will jump by an amount proportional to the subsidized payments, as effectively the cost of carrying a mortgage is reduced across the board for all owners

Essentially you may as well say “Why doesn’t the government pay everyone who has a mortgage an annual cash bonus of $X”

Now maybe what you meant here was that you should be able to tax deduct *interest* on mortgages, in which case yes that’s a very good idea as it completely levels the playing field between investors vs home owners (as investors can already do this). This is how it works in the USA.

Alternatively you could just scrap tax deductibility of interest for investors. It doesn’t really matter either way… what matters is that currently the system is biased towards investors, so they can outbid home owners for the same property.