Let's Discuss Mortgage Interest Rates

Everyone’s been very excited about interest rates in Australia and what Reserve Bank action will do to mortgage rates.  And, rightly so since it affects the real estate and property related markets in so many ways (adversely when interest rates increase).

But, that made me think of another issue around mortgage interest … their tax deductibility.

Most countries do not allow taxpayers to reduce their taxable income by the interest paid on a loan which is secured by their principal residence (or, sometimes, a second home).  Australia is one of them.

But some countries do allow it … and they are the Netherlands, Sweden, Switzerland, and the United States.

It’s an interesting proposition with arguments for and against as follows.

Reasons why mortgage interest should be deductible

• Deductibility incentivises home ownership
• In countries that impute tax income on home ownership the deduction is for income-producing purposes
• The increased number of owned properties and the likely higher prices/values of properties will create other taxable income

Reasons why mortgage interest should not be deductible

• Deductibility does not significantly impact home ownership either way
• It allows taxpayers to circumvent the general rule that interest on personal loans is not deductible
• The deduction disproportionately favours high-income earners

Whilst I think that there are social equity issues, in an economy and society where home ownership is a cultural requirement and the key wealth development strategy for most people … I think we should allow home mortgage interest to be deductible.

See you at the ATO refund counter queue.

Francesco …