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

TuggLife said :

I honestly commend you for surviving paying 40-60% of your take-home income on rent. Spending roughly a third is what is generally considered to be the maximum (depending on your other expenditures, such as transport) that is sustainable given the general cost of living (http://www.domain.com.au/news/sydney-melbourne-rent-costs-third-of-tenants-income-20160129-gmgpow/). God forbid that you try and save for your own property as well…

We were never able to save a deposit so home ownership only became available through the first home buyer’s grant. We also got assistance from some friend/family ties in the finance sector who pulled strings to get us a loan despite our “apparent” incapacity to maintain a mortgage, despite the fact we had been paying as much in rent for many years.
Yes, paying off a loan when most of your income goes towards it is not easy. The entire family has to sacrifice, the kids by missing out on their sports and parents not having much of a social life plus getting by with cheap rust-bucket cars. It is worth every bit, to be secure in your own home knowing you do not have to move every few years because the landlord sells the property or the lease has run out.
When I was working before succumbing to injury some three years ago, the mortgage was about half my take home pay. It was doable but left nothing for a rainy day, plus some very average birthdays, no holidays and strict budgeting. Now the payments are more like 60% of WC benefits, so if not for my spouse working to bridge the gap we’d be selling up and going back to renting. Thank goodness for cheap interest rates.

TuggLife said :

Spence said :

virgil99 said :

what’s the point in saving for a deposit if house prices are going to keep climbing as you save? Given that you’re spending roughly a third of your income on rent anyway… might as well enjoy yourself now, because chances are you might not be able to buy if the market continues this way.

It is a mindset issue, but it’s also understandable in lots of ways. There are so many negatively geared investment properties that seem to be blocking young people out of the market, and the concept of a “starter home” isn’t much fun when you just want somewhere to live. I’m not saying it’s the right mindset, but I completely understand it.

Your first question there is totally right. Why bother trying to save when houses just keep getting more and more expensive, making your deposit target climb higher the closer you get to reaching it.
One third of your income on rent? Really? Either those in their 20s are being paid way too much or their rents are bugger all. The decade prior to us buying our own home, we consistently were paying between 40 and 60% of my single income on rent. There was nothing cheaper and I was on good wages. How do you save when most of your pay from a not necessarily permanent or full time job goes towards paying off someone’s second or third investment? You definitely need two average incomes or one very well paid job as a single for any chance to get out of the rent cycle. Either that or rich, charitable parents, which is how nearly all our friends/relatives got their houses. Without a government grant system and support network to help with childcare, a standard 2 parent 2.5 children, single income family have buckley’s of owning their own home.
But hey, if you live on bread and water for 5 years, live in a garage or the backseat of a car, anything is possible.

I honestly commend you for surviving paying 40-60% of your take-home income on rent. Spending roughly a third is what is generally considered to be the maximum (depending on your other expenditures, such as transport) that is sustainable given the general cost of living (http://www.domain.com.au/news/sydney-melbourne-rent-costs-third-of-tenants-income-20160129-gmgpow/). God forbid that you try and save for your own property as well…

The one-third-of-income mortgage stress indicator is pretty useless. Housing is a merit good, which means that as people grow more wealthy, they tend to spend higher proportions of their income on their house (private health insurance is another example). There are plenty of wealthy individuals that would spend two-thirds or more of their income on their house, but still have plenty left over to spend on other things.

Spence said :

virgil99 said :

what’s the point in saving for a deposit if house prices are going to keep climbing as you save? Given that you’re spending roughly a third of your income on rent anyway… might as well enjoy yourself now, because chances are you might not be able to buy if the market continues this way.

It is a mindset issue, but it’s also understandable in lots of ways. There are so many negatively geared investment properties that seem to be blocking young people out of the market, and the concept of a “starter home” isn’t much fun when you just want somewhere to live. I’m not saying it’s the right mindset, but I completely understand it.

Your first question there is totally right. Why bother trying to save when houses just keep getting more and more expensive, making your deposit target climb higher the closer you get to reaching it.
One third of your income on rent? Really? Either those in their 20s are being paid way too much or their rents are bugger all. The decade prior to us buying our own home, we consistently were paying between 40 and 60% of my single income on rent. There was nothing cheaper and I was on good wages. How do you save when most of your pay from a not necessarily permanent or full time job goes towards paying off someone’s second or third investment? You definitely need two average incomes or one very well paid job as a single for any chance to get out of the rent cycle. Either that or rich, charitable parents, which is how nearly all our friends/relatives got their houses. Without a government grant system and support network to help with childcare, a standard 2 parent 2.5 children, single income family have buckley’s of owning their own home.
But hey, if you live on bread and water for 5 years, live in a garage or the backseat of a car, anything is possible.

I honestly commend you for surviving paying 40-60% of your take-home income on rent. Spending roughly a third is what is generally considered to be the maximum (depending on your other expenditures, such as transport) that is sustainable given the general cost of living (http://www.domain.com.au/news/sydney-melbourne-rent-costs-third-of-tenants-income-20160129-gmgpow/). God forbid that you try and save for your own property as well…

dungfungus said :

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

I thought the federal funding for elimination of State/Territory government stamp duties was lost with the deal with the Democrats to get the GST legislation through the Senate, which involved exemptions such as for fresh food. No argument that the subsequent federal mining boom revenues could have been better managed, but State and Territory governments have been equally prone to treat temporary revenue windfalls as permanent, too.

virgil99 said :

what’s the point in saving for a deposit if house prices are going to keep climbing as you save? Given that you’re spending roughly a third of your income on rent anyway… might as well enjoy yourself now, because chances are you might not be able to buy if the market continues this way.

It is a mindset issue, but it’s also understandable in lots of ways. There are so many negatively geared investment properties that seem to be blocking young people out of the market, and the concept of a “starter home” isn’t much fun when you just want somewhere to live. I’m not saying it’s the right mindset, but I completely understand it.

Your first question there is totally right. Why bother trying to save when houses just keep getting more and more expensive, making your deposit target climb higher the closer you get to reaching it.
One third of your income on rent? Really? Either those in their 20s are being paid way too much or their rents are bugger all. The decade prior to us buying our own home, we consistently were paying between 40 and 60% of my single income on rent. There was nothing cheaper and I was on good wages. How do you save when most of your pay from a not necessarily permanent or full time job goes towards paying off someone’s second or third investment? You definitely need two average incomes or one very well paid job as a single for any chance to get out of the rent cycle. Either that or rich, charitable parents, which is how nearly all our friends/relatives got their houses. Without a government grant system and support network to help with childcare, a standard 2 parent 2.5 children, single income family have buckley’s of owning their own home.
But hey, if you live on bread and water for 5 years, live in a garage or the backseat of a car, anything is possible.

dungfungus said :

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 think part of the problem is that young people are becoming jaded with the prospect of entering the property market. For many, who don’t want a property portfolio and instead just want one house to live in, that dream seems out of reach because the prices are so high. Because of this, things like overseas holidays and dinners out gain in appeal – what’s the point in saving for a deposit if house prices are going to keep climbing as you save? Given that you’re spending roughly a third of your income on rent anyway… might as well enjoy yourself now, because chances are you might not be able to buy if the market continues this way.

It is a mindset issue, but it’s also understandable in lots of ways. There are so many negatively geared investment properties that seem to be blocking young people out of the market, and the concept of a “starter home” isn’t much fun when you just want somewhere to live. I’m not saying it’s the right mindset, but I completely understand it.

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.

I would actually argue that singles aren’t much better off than families – for the reasons you mentioned (paying rent while also trying to save $30k+) but also because when the banks are giving mortgage approvals, they look at the household income. If it’s just you, even if you have a sizeable deposit, you’re high risk because there is no safety net if something happens to your employment (and difficult if you’re earning less than $75k annually as well). This is especially noticeable if you’re working on a contract instead of in permanent work. It’s easier for singles to buy off the plan, really, in terms of finance – especially as banks are tightening the strings on loans, as they have been over the past couple of years.

If you’re buying property as a part of a couple (no kids), or with a sibling, you’re more likely to get unconditional finance approval because of the perceived safety net. The property market is definitely skewed in some directions more than others.

farnarkler said :

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).

Technically, house prices are static (no movement in real terms, therefore dropping in nominal terms if we assume a positive rate of inflation). ABS defines established homes as detached housing (i.e. not apartments) regardless of age.

The price of apartments is going down. That is based on the figures released for the March quarter.
Over the year, taking into account both detached and attached housing, prices are up a bit over 4% in Canberra.

dungfungus said :

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.

Most people probably support increased rates as opposed to stamp duty. But we now have both.

It’s the double-dipping that got people angry (myself included). That and the fact you can’t trust the government to keep it revenue-neutral (i.e. increase the rates just enough to recoup the lost stamp duty).

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.

I did say best to do this before children, and this is not limited to singles. A couple with two incomes are in a better situation to do this than a single. Mostly I lived in a group house before this, so my rent was only a share of the house, making saving easier. I did live for a time in a flat, but it was an unusually cheap flat. I left home at eighteen and moved to Canberra, so no living at home for me.

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.