Mortgage deduction abandoned?

The mortgage deduction is a topic constant under discussion. This time the discussion is about abandoning the entire mortgage deduction. Is that likely to happen? Maybe yes.

Mortgage deduction
The mortgage deduction implies that the house is seen as a source of income. A source of income creates the possibility of deducting the costs. Costs related to the loan taken out to purchase the home. As the loan is often a mortgage. This deduction is referred to as mortgage deduction.

Deducted is the interest you pay on a loan. Let us assume you took out EUR 300.000 loan at 1.1% interest, you pay EUR 3.300 interest per year. The threshold for deduction is 0,6% of the WOZ value, in this example EUR 1.800. In this example the deduction in the income tax return is EUR 1.500.

Why abandon this deduction?
The European Union has indicated in 2011 already that the Netherlands needs to stop this subsidizing of house costs. This discussion with the EU was already an old one, but in 2011 the Netherlands had no more arguments against the EU position. Hence already in 2012 the maximum income tax percentage of 52% for the deduction gradually dropped.

In 2021 the maximum tax deductible percentage of a mortgage deduction is 43% and in 2023 the maximum percentage is 37,05%. Experts have stated that the 37,05% is not a random percentage. It is the moment that moving the house from Box 1 to Box 3 makes little or no difference.

Is the termination of the mortgage deduction a problem?
That depends who you ask. If you ask the person in the above example with the EUR 300.000 house, that house has now an increased WOZ value of EUR 480.000. The loan has not changed. The interest paid is still EUR 3.300, but the threshold is now 0,6% of EUR 480.000 is EUR 2.880, so the deduction is EUR 420 at 43% tax deduction is EUR 180 tax back.

No longer getting EUR 180 tax back does not make a difference. But what if you just purchased this house. You had to over bid and paid EUR 590.000 for this house. You take out a loan for EUR 590.000 at 1.2%. You expect to pay EUR 7.080 interest, have a EUR 3.540 threshold, so deduct EUR 3.540 in the income tax return. At 43% is EUR 1.522. That is nearly 22% of the interest you paid. Based on these parameters you purchased the house. Losing the mortgage deduction is a problem.

EUR 100.000 gift – no more?
In the above situation the EUR 590.000 house was actually too expensive. Fortunately, the parents of your Dutch partner were able to donate tax free EUR 100.000. So the loan to be taken out was only EUR 490.000.

This EUR 100.000 is also under attack. Mr Klaas Knot of the Dutch national bank argues that the mortgage deduction should be terminated and the EUR 100.000 tax free donation for the purpose of house purchase should be stopped. What more can he think of to jeopardize starting house owners?

Termination 0% transfer tax for starting house owners
Mr Klaas Knot advised to stop all incentives facilitating the purchase of a house. This includes the 0% transfer tax for starting house owners. From a banker’s point of view this is a logical statement to solve a problem. He was quick to add that the true solution is building more houses. But is it? If starting home owners cannot deduct the mortgage deduction, that seasoned home owners had done over the years. They cannot benefit from the one time EUR 100.000 gift and the transfer tax is introduced again for this group. Will they be able to purchase? Will others who want to sell to flow to the newly build homes be able to sell?

The termination of the mortgage deduction is in evitable. The Netherlands cannot disobey the European Union orders. The group that is hurt by this and the other proposed measures are the first time buyers.

Written by Arnold C.J.Waal
Orange Tax Services