We have quite a few taxes, deductions and surcharges. But what exactly are they good for, and where do they come from? In Your tax cents, we take a different surcharge or tax under the microscope every time. This time: the mortgage interest deduction.
Many a homeowner is well aware that the mortgage interest deduction is shrinking. The government subsidizes home ownership less and less.
"Since 2013, mortgages have to be fully repaid in 30 years in order to be eligible for mortgage interest relief. In addition, the maximum rate at which the mortgage interest can be deducted is being phased out more and more quickly," a spokesperson for the tax authorities summarizes. The maximum deduction for the mortgage interest was once 52 percent. In 2023 the so-called basic rate will come out at 37.05 percent.
This is a turning point in Dutch politics. The mortgage interest deduction has been around since 1914, and changing that for decades was taboo in The Hague. Even though economists have long been claiming that the deduction is market-distorting, and that it should be reduced or even canceled. But that writing in your election program was seen as political suicide in the twentieth century. The so-called H-word was loaded in such a way that the parties often had no official opinion about it, according to an analysis by the CPB.
Criticism of deduction from the financial crisis
This all changed around the new millennium. "Not only experts but also the SER and the Housing 4.0 advisory group argue for a central housing policy. The reduction of the mortgage interest deduction eventually became negotiable," says Peter Boelhouwer, professor of housing policy at TU Delft.
"Is this arrangement effective? No! Now you give benefits to people who already have money and a house to buy. ”Peter Boelhouwer, professor of housing policy
Since the financial crisis in 2008, criticism among citizens has also grown. At the height of the crisis, 70 percent of Dutch people wanted the home ownership deduction to be phased out, according to DNB Household Survey.
This has recently happened. The gap that the scheme leaves behind in the Budget Memorandum is getting smaller every year - even though this is mainly due to the current low interest rates. In 2017, the so-called budgetary importance for the mortgage interest deduction was 11.7 billion euros; in 2020 it is expected to be 9.5 billion.
This does not mean that fewer and fewer people are entitled to this benefit - the other way around. Around 3,800,000 households currently make this deduction; the figure is rising every year because more and more people live in a house for sale.
Koophuis was an investment
Why does the mortgage interest exist at all, when experts have been calling for decades that the deduction must be reduced or even removed? The original reason was completely different from what we now associate with this arrangement. Namely: cost deduction for (fictitious) income.
It was like this: When the mortgage interest deduction was introduced, the tax authorities saw a home as assets and it was taxed that way. A house for sale was an investment with which you could earn money: rent. The government wanted more homeowners and so decided to subsidize home ownership.
For the costs that buyers incurred (the mortgage interest) to buy a house, they were allowed to deduct the earnings (the rent). This was also the case if you did not rent your house; also the fact that you lived in it yourself was seen as a kind of income.
See also: Tenant in free sector often cannot save enough to buy a house
"It drives up selling prices"
Only since the nineties has the mortgage interest deduction been seen as a tool to help citizens to find a house to buy. The fact remains that researchers and advisory groups find the regulation disruptive to the market.
"It drives up selling prices and rents have to compete with that," says Professor Boelhouwer from TU Delft. According to him, this makes it very difficult, for example, to build more homes with a rent of around 1,000 euros per month.
He thinks it is nonsense that people like him - middle-aged homeowners with a good income - are also entitled to the mortgage interest deduction. "The government wants to encourage home ownership and then you have to ask yourself: is this scheme effective? No! Now you give benefits to people who already have money and a house to buy."
Lower transfer tax better for starters
And this while especially (young) people with a middle income have problems financing a house. To help this group, policymakers should go for a lower transfer tax for starters, subsidies or building savings with a tax premium, says Boelhouwer.
Actually, the mortgage interest deduction must go completely, says the professor; "of course you have to do it in steps". One way to compensate for the canceled interest deduction is to reduce income tax and to raise the notional rental value (an additional tax on home ownership). Boelhouwer: "The mortgage interest deduction is very conservative and has nothing to do with freedom of choice. It also leads to lower tax revenues and less money for prosperity."
But canceling the mortgage interest deduction is not on the planning of policy makers. From a historical perspective, the current phasing out of the scheme is already a small revolution in the fiscal Netherlands.
See also: DNB president: Tax system is too complicated and 'unbalanced'