On 9th June of this year the Dutch will vote again for a new Government. And one of the main topics on every political party’s agenda is how to cut costs. Our Administration has to deal with a huge budgetary deficit and the annual “housing budget” has to be cut by 20%. Rental subsidies may be cut. But one of the easiest ways to cut the State’s housing budget is by limiting the tax rebate on mortgage interest payments. However, this could be the worst moment to do so.
Consumer confidence is just getting back on its feet and the mere possibility of a future cut in mortgage interest tax reduction, could be enough to frighten off the weak hearted potential home buyer. But is this fear based on mere emotion or on real facts and figures?
In Sweden the tax rebate on mortgage interest was abolished in 1991. And yes, the housing market took a plunge. But was this entirely due to the abolishment of the mortgage tax deduction? Probably not, since Sweden had other problems to deal with simultaneously. The exchange rate of the Swedish Crown was abominable at that point (affecting their export) and interest rates sky high. And after a plunge of 30 to 40%, the Swedish housing market recovered to a point that today house prices in Sweden are 200% higher than they were in 1991 and the big cities even have a shortage of houses.
It looks as though the Dutch Government took a good look at what happened in Sweden and made use of lessons learned. Do we like the possibility of mortgage interest tax rebates being cut in the future? Well, what’s new. Holland has gradually been cutting back on the mortgage interest tax deductions for several years already:
- In 2001 it was decided that mortgage interest could only be deducted from income tax if the money was actually used to purchase or renovate one’s primary residence (and not one’s holiday home, cars, etc.). Furthermore the duration of mortgage tax deduction was limited to 30 years. (Prior to this date, home owners could enjoy life-long mortgage interest tax deductions).
- In 2004 a new tax bill determined that if you had a surplus value in your home when selling it (the difference between the selling price and the amount of mortgage owing), this surplus would no longer be tax deductible in the mortgage of the new home.
- A small part of the annual mortgage interest payments was and is not tax-deductible (so called “Eigen Woning Forfait). Up until 2009 this non-deductible part of the interest payments was maximized. This year, the maximization of this Eigen Woning Forfait (home ownership value) was abolished, thereby reducing the tax deduction of mortgage interest for houses worth more than € 1.6 million. To put it in plain English: if your house is worth more than € 1.6 million, your tax rebate will be reduced.
- This year this “Eigen Woning Forfait” will be increased even more for houses with a WOZ value of over € 1 million. (WOZ value is not the real market value, but a fictitious value for tax purposes, determined by the municipality). Anyway, in layman’s terms, this means that for houses over € 1 million, the tax rebate on mortgage interest will be limited even further.
- As from 2004 any surplus value in your old home would not be tax deductible in the new home. However, if you moved to a cheaper home, you could at least keep the original tax deduction of the old home. Well this advantage will also be abolished as from this year.
And although as a mortgage advisor I love the tax deductions on mortgage interest payments, I also understand that our Government has to find money in many different fields to cut their budgetary deficit. Since 2001 our Government has very sneakily reduced the mortgage interest tax rebate, but obviously in a smart and gradual way, since it has not affected Dutch house prices. In Sweden, the housing market is healthier than it ever was before. I trust our Government to continue on their path of very gradual measures to save money on their housing budget. Since doing it the slow and careful way, we will keep our healthy housing market, without taking the plunge……………..