What if interest on your home loan was tax deductible?
Housing Affordability; it's the catch-cry of the year. It seems we can't go a day without hearing the words, especially when used in conjunction with the other latest slogan; "mortgage stress". Even politicians have entered the discussion with the idea of making the interest repayments on first home-buyer's mortgages tax deductible to try and ease this affordability crisis.
In the United States, interest repayments are tax deductible on owner-occupied loans. Currently in Australia however, only the interest repayments on investment properties can be used as a tax break. It would appear that our current system favours those with the capital to invest but if we were to adopt tax deductible repayments for first home buyers to try and even the playing field; how much could they save?
The average mortgage in Australia is $250,000 taken over 25 years. More than half the home loans in Australia are standard variable rate loans and the average interest rate for these across all home lenders is currently 7.99%. Using these figures and assuming that the borrowers pay principle and interest from day one, the monthly repayment would be $1,927.81.
In the first year alone that's a total repayment of $23,133.72 and further assuming that the loan is kept for the full term, the total repayments will be $578,350 comprising of $328,350 in interest. Each year this equates to $13,134 that would be tax deductible.
Tax rates do change from year to year but for simplicity, we will use the rates for the 2007-08 financial year as a guide excluding the Medicare Levy.
Tax rates 2007-08| Taxable income | Tax on this income |
|---|---|
| $1-$6,000 | Nil |
| $6,001-$30,000 | 15c for each $1 over $6,000 |
| $30,001-$75,000 | $3,600 plus 30c for each $1 over $30,000 |
| $75,001-$150,000 | $17,100 plus 40c for each $1 over $75,000 |
| $150,001 and over | $47,100 plus 45c for each $1 over $150,000 |
| Source: ATO | |
Economic Indicator Data released by the Australian Bureau of Statistics at the end of November states that in August the ordinary time average full-time weekly earnings of male employees was $1,173.76 and for females was $981.79. For a household with two full-time working adults, this equates to approximately $112,088.60 per annum.
Using the above table the total tax paid each year by this couple would be $22,827. However if their combined income were reduced by the $13,134 they would pay in interest off their home loan, they would only pay $18,887 in tax, a saving of $3,940 each financial year.
Multiply this yearly saving across the life of the loan and that's a total of $98,500 which is a saving of 17% of the total amount they would repay.
Making interest on your home loan tax deductible in this way would certainly put the great Australian dream back on track for the majority of us.
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