What is tax-deductible mortgage interest?
Tax-deductible mortgage interest is a form of tax relief for homeowners. As a homeowner, you pay a specific amount of interest on your mortgage every month. You may deduct the amount of mortgage interest you pay from your income (under certain conditions). This reduces your taxable income, which means you pay less income tax on your annual tax returns.
Did you take out a mortgage after 1 January 2013? Then you can only deduct interest if you are paying off your mortgage in full within 30 years. This automatically means you must have an annuity mortgage or a linear mortgage. In addition, you are obliged to keep to the payment plan. If you do not, you lose your right to tax-deductible mortgage interest.
Effect of type of mortgage
With an annuity mortgage, you pay more interest on your mortgage in the initial period than with a linear mortgage. That sounds negative at first, but paying more interest also means you can deduct more interest on your tax returns. Many first-time buyers opt for an annuity mortgage for this reason, amongst others.
Effect of maximum rate for tax-deductible interest
The percentage of interest you can deduct is also of importance. This depends on the tax bracket within which your income falls. Do you fall into the high-income bracket, for example? Then you pay up to 51.95% income tax on your income over € 68,507 (for your tax liability for 2018). You may deduct mortgage interest from that income, but only up to a maximum of 49.5% (this was 50% in 2017). This rate is expected to be reduced further in the coming years.
Calculating the tax relief on your deductible mortgage interest
The tax relief on your deductible mortgage interest depends on a number of factors. These are:
- The amount of mortgage interest you pay over a whole year
- The cadastral value of your home
- Your income
- Adjustment of the maximum rate for tax-deductible mortgage interest
Your notional rental value is calculated on the basis of the cadastral value. This sum is added to your gross annual income. The interest you pay on your mortgage in that tax year is then deducted from this. The sum that remains is your taxable income. The percentage of income tax you need to pay on that ultimately depends on how much you earn (and thus into which tax bracket you fall) and the maximum rate for tax-deductible mortgage interest for that year.
From 2019, the maximum rate at which interest can be deducted is 49%. This maximum rate will gradually be reduced to 37.05% in 2023. This means your relief on tax-deductible mortgage interest will decrease in the coming years, particularly if your income falls into the higher tax brackets.
The cadastral value is also expected to increase compared to this year. Normally, this means that related taxes, such as notional rental value, will increase too. However, notional rental value rates are being lowered in coming years to reduce pressure on home owners.
Finally, the Hillen Act is also gradually being abolished. In short, this means your net costs could become higher than your gross costs in future. As it happens, the amount you ‘save’ on your tax-deductible mortgage interest is reducing, because you keep paying less interest as you pay off your mortgage loan. However, the value of your home is likely to increase, as a result of which you lose more on notional rental value. At a certain point, the additional tax liability (notional rental value) will be higher than the deductible (the interest paid). The Hillen Act compensated for that, but will be abolished in future.