Many homeowners will lose mortgage interest deduction if gov't doesn't make a decision
The Dutch government needs to decide what to do about the mortgage interest deduction now, otherwise there will be chaos starting in 2031, civil servants from the Ministry of Finance warned in a report sent to parliament. From that year, the right to the maximum deduction will expire for many homeowners. But no one is quite certain who will be affected because no agency is keeping track of this, NOS reports.
This will affect primarily people with a (partially) interest-only mortgage dating from before 2013. It concerns an estimated 1 million homeowners.
The problem with the mortgage interest deduction is a legacy from the 1990s, when interest-only mortgages took off. With an interest-only mortgage, homeowners do not repay their home loan, or part of their home loan, during its term, but only pay the interest. The mortgage interest deduction also allowed them to deduct the maximum mortgage interest indefinitely from their taxes. This cost the Treasury a lot of money.
The Kok II Cabinet therefore decided to allow homeowners to only deduct mortgage interest for a maximum of 30 years, starting in 2001. The only problem is that the Cabinet made no agreements regarding who would keep track of this.
In 2031, the first group of homeowners' right to the mortgage interest deduction will expire. They are responsible for their own tax returns and filing them correctly. But it is incredibly complicated for people to determine how long they have had a deduction on which loan, especially if there have been moves or divorces in the past 30 years.
Homeowners can’t ask institutions like banks and mortgage advisors for this information either, because they are not allowed to store such data for extended periods. The same applies to the Tax Authority, which also means that the tax office can’t effectively verify people’s tax returns on this point. The Ministry of Finance also admits that it is practically impossible.
The Ministry of Finance officials expect a whole lot of complicated legal proceedings from 2031. For homeowners, losing the mortgage interest deduction could result in a significant increase in housing costs. And after 30 years, this often comes right at retirement age, when many people face a significant drop in income.
The civil servants made several proposals to preempt these problems, but they all come with advantages and disadvantages. One option is to stop the mortgage interest deduction for all interest-only loans dating from pre-2013 at once in 2031. But that would mean that a large group of homeowners would receive their mortgage interest deduction for less than 30 years.
Another option is to stop the deduction for these loans only in 2043, when they are all at least 30 years old. Some homeowners would then be able to deduct their mortgage interest for longer than 30 years, costing the Treasury an estimated €1.4 billion per year.
The government could also opt for various intermediate variants and transitional arrangements. Or the government could do nothing at all. The consequence is that some people will claim the deduction for longer than allowed, while others will stop it too early out of fear of the consequences. This would cost the Treasury around €100 million a year, but would also harm tax compliance - people’s willingness to do their taxes correctly.
The Cabinet is facing a difficult choice, especially because the mortgage interest deduction is a sensitive issue within the coalition. The VVD wants to retain the deduction in full, while the D66 and CDA want to phase it out. The coalition agreement promises to leave it unchanged. The discussion flared up again on Wednesday when the three parties voted differently on a motion regarding the deduction.
The Civil servants are urging the Cabinet to make this decision now, because the consequences of the uncertainty are already noticeable in practice. For instance, mortgage advisors are effectively no longer able to provide sound advice because they don’t know what will happen in the coming six years.
What the government will do with this advice is unclear. D66 State Secretary Eelco Erenberg of Finance promised to come up with a solution. But VVD Deputy Prime Minister Dilan Yeşilgöz, the champion of the mortgage interest deduction, insists that a future Cabinet will make a decision.