Mortgage interest relief make mortgages affordable

While the pandemic may have grabbed the public’s attention in recent months, the housing crisis which dominated the last election has not abated. Unfortunately, quality housing remains unaffordable for many.

Despite Covid-19, house prices have not fallen while obtaining a mortgage has simultaneously become more difficult.  Many applicants are asked by banks to provide evidence of their employment or salaries not being affected by the pandemic before loan approval is granted, something we would all wish for, but few of us can achieve.

While the housing crisis has proved an intractable problem for successive governments, there is several relatively straightforward measures open to the current administration which would have the overall effect of making housing more affordable and accessible. These include the reintroduction of mortgage interest relief for first-time buyers, the extension of the Help to Buy scheme until 2025, and changes to the tax treatment of private landlords.

Irish homebuyers pay significantly higher mortgage rates than their counterparts in the UK and mainland Europe. This is due to a combination of factors including a relative lack of competition in the market, a relatively high rate of defaults coupled with low rates or repossessions, and a requirement by the banks to build up capital reserves to prepare for future shocks.

Politicians may decry these hight rates, but there is little that can be done about them by the state and homebuyers are still left to pick up the tab for them. Mortgage interest tax relief was abolished with little opposition in the wake of the Great Financial Crisis. Austerity was the order of the day and this was one more way for the state to save money.

The policy view of the response to the current crisis appears to be different on this occasion, however. Stimulus is now seen as more appropriate than austerity and the reintroduction of mortgage interest tax relief would accord with that agenda.

A couple with a mortgage of €300,000 paying 2.5 per cent interest would stand to gain €1,875 in annual relief (25 per cent of the €7,500 interest bill). This would make mortgages more affordable and provide a vital cash flow injection for families at a time when they need it most.

Deposits on new homes must typically be 20 per cent of the cost of the property. High rates of personal taxation coupled with exorbitant rental levels make this unachievable for all but the fortunate few on very high incomes or those who have help.

The Help to Buy scheme has been invaluable in helping first-time buyers accumulate the level of savings required. It has been the largest single support for homebuyers in modern history. It works by giving a refund of income tax and Deposit Interest Retention Tax (DIRT) paid in Ireland by homebuyers over the previous four tax years subject to a cap of €30,000.

It is due to expire in 2021 and the practice up until now has been for the Government to announce an extension in the Budget in the year before the expiry date. It is now time for a bolder move, and the scheme should be extended for an additional four years until 2025 to give people longer-term certainty it will still be available to them when they come to buy. Property purchase is a long process and extending the scheme by another year or two would be insufficient, particular in circumstances where it will take people some time to recover from the financial impact of Covid-19.

Such a move by government would be fairly uncontentious. That may not be the case with any moves to provide support to private landlords but there is a compelling argument to be made for such a move.

We have created a tax system where larger investors benefit disproportionality when compared to smaller landlords, leading to significant levels of private landlords exiting the market as a result. There is therefore a requirement to encourage greater diversity with the effect of increasing supply of rental properties on the market while also moderating rents.

This could be achieved through the provision of tax-deductible capital allowances on the acquisition of new residential properties where these properties are rented to lower or mid-income people at less than 75 per cent of the normal market rent.

This measure would simply equalise the treatment of both classes of investors thereby altering the composition of the market. Market inequality would be prevented by tying the relief to ‘social’ rents.

These three measures alone could have a significant impact on the housing crisis, but there are others which the government could consider to reduce the cost of housing for first time buyers. For example, VAT could be abolished on the sale of new houses for a five-year period to owner-occupiers or landlords who rent to tenants on lower to mid-income levels. In addition, development levies payable to local authorities on new housing could be waived for a five-year period and Capital Gains Tax on the sale of lands for residential development could be cut to 20 per cent for five years to encourage landowners to dispose of lands and sites to builders.  Similar measures have worked successfully in the past, both in Ireland and abroad.

Of course, these supports to increase affordability must be matched by the provision of vast quantities of housing stock. While the government is planning to ramp up the number of State built homes, the level of demand for affordable housing necessitates the creation of a National Social Housing Body that would be responsible for the building of 50,000 social and affordable houses across the country that are available to purchase with soft loans or lease on reasonable rental levels with security of tenure and minimal rent increases.

The Covid-19 pandemic has opened up minds to radical thinking and solutions that would have been unimaginable in normal circumstances. It is time to take bold moves in relation to the housing crisis to improve affordability and provide support to the people who most need it at this most critical time.

This article first appeared in The Irish Times in October 2020