The future of the Dutch mortgage interest deduction (sponsored contribution)

14th October 2010, Comments 1 comment

Expert Henk Jansen from Expat Mortgages explains the past, present and future of Dutch mortgage interest reduction.

One of the main arguments that home buyers mention is that interest is tax deductible. 
Besides flexibility in choice of location, and capacity, building is the third most common argument for interest deduction.

Why is mortgage tax deductible? 
In the beginning of the 20th century, the Dutch government wanted to promote home-ownership. Therefore, it was decided to make the interest tax deductible.

Much has changed since the last period of the 20th century. Currently, the mortgage interest is deductible only if there is: 
- A loan for purchase, buyers costs and/or renovation costs 
- An individual’s own property that is your principal residence 
- A maximum period of 30 years 
- Profit of an earlier (own) property is deducted

What will the future bring? 
The Netherlands is the only remaining country in the EU where mortgage is, in this way, tax deductible. This interest deduction costs the government more than EUR 11 billion per year. 

On the other hand, home ownership (and the purchase and sale of property) brings the government a lot of money, and revenues include property transfer tax, notional rental, VAT on new buildings and renovations. In total, this involves an amount of nearly EUR 10 billion. 

However, there is speculation about completely eliminating the mortgage interest deduction. 
Owner-occupation in the Netherlands is around 60 percent. And since the effect of your own home ownership will be huge in the Netherlands, there is no government that has dared burn this sensitive topic.

There are various scenarios devised both political and non-political: 
- Only in the first tax deduction (33.45 percent in 2010) 
- Capping maximum allowable loan (for example, EUR 500,000) 
- Abolish a period of years (for example five percent or ten percent per year) 

The rigorous abolition of mortgage interest deduction, as in the UK in the early ‘80s, or Sweden in the mid ‘90s, seems in these times of economic crisis not to be obvious. Yet everyone assumes that something must be done. The question is when, and how? 

The consequences of abolishing the mortgage interest deduction is difficult to predict and will mainly depend on how and when the interest deduction would be reversed. In addition, the discussion should include the deductible (mortgage) and the burdens of homeowners (transfer tax, notional rental, lease, etc.). The housing will be less attractive, which already seems to be established. Many existing home owner’s finance will become heavier, as their interest is not deductible. In the end, both cases will exert their influence on the future of Dutch housing prices.

Henk Jansen /  Expat Mortgages

1 Comment To This Article

  • David Lagewaard posted:

    on 12th December 2011, 10:56:48 - Reply

    'In the beginning of the 20th century, the Dutch government wanted to promote home-ownership. Therefore, it was decided to make the interest tax deductible.'

    Nonsense. Pure unadulterated crap.

    In 1893 the Dutch government wanted to replace old taxation forms with the then absolutely new Income Tax. Income included rent received. Living in one's own property was considered a saving, thus (taxable income).

    As a compensation the property owner would be allowed to report cost of maintaining the property as negative income. Amongst these cost the rent paid on a mortgage.

    It lasted a full 100 years before any problems arose. The reason being that a) mortgages were basically never more than 70% of execution value of the property and mortgages were paid of in 30 years thus reducing the tax reduction annually.

    Things went wrong when those simple limitations were put aside.