Mortgage interest relief set to end, but is it worth it?

Mortgage interest relief ‘tax relief at source’ or just ‘trs’ is a credit available to first time buyers who purchase their first home prior to the end of 2012. Currently it is due to be discontinued from 2013.

At the moment it is applied as follows:  up to a maximum of €10,000 interest per buyer can be applied so you take your total interest paid for the year and add it up.

Say you buy for 200,000 with a 10% deposit and an interest rate of 4.5% the cost per year is €1000pm over 25yrs. The interest portion is as follows:

(200,000 * .9 [90% mortgage) * 4.5% = 180,000 * 4.5% = approximately €8,100 a year will be treated for TRS reasons which is 25% for the first two years reducing to 22.5% for the next three years and 20% after that.

The 8,100 gets 25% relief = €2,025 or about €169 a month. In the example above when you get this credit it will mean that your ‘cost’ is €1,000 – €169 or €831 per month.

Because the whole scheme ends in 2017 you will only get 5 years (so your lowest rate will be 22.5%), and in order to qualify you have to draw down your loan before the 31st of December 2012.

that last point is important, if you have not drawn it down before then (say there is some delay with insurance policies or one of the other typical things that go wrong between solicitors, banks and borrower) then you will miss out completely.

While some people say they are holding out because they think prices will fall, it is important to note that different areas perform differently and those buying in cities may do well to do this calculation before making that decision.

Imagine the person in the example above waits and gets a property for 10% less next February 2013, they buy for €180,000 with a 10% deposit = €162,000 at 4.5% over 25ys = €900pm.

But now there is no tax relief, so the amount leaving their account is €900 while the person who bought before is paying €70 less even though the current buyer got their place for cheaper!

Then consider the total interest over the life of the loan. At 200k it works out as 120k (less TRS of c. 2025 +2025 + 1731+1731 (ends 2017) = 7512 so its about €112,500 then add on the €20,000 principle to even out the price difference and it’s €132,500.

For the person who didn’t get it, they will pay less interest over the life of hte loan (that’s a good thing) but what about the time period difference? You have to calculate for that as well. On the €180,000 purchase the total interest will be €108k plus rent until you buy (say the people in this instance rent for €1,000 a month for a further 7 months which is €7,000). And the fact that the other person will be mortgage free before you means you’ll have the mortgage payment of €900 x 7 = €6,300. So on top of the €108,000 you add 13,300 and get €121,300.

The other person will be mortgage free at this point, I’m making an unfair assumption that they’ll save this money, but moreso to demonstrate the point than to say it actually happens, they put aside the €1000 they’d normally pay for 7 months – we are doing this to make the debt and expenditure periods match up. So from their €132,500 you subtract €7,000 (technically you are adding it to savings but I’m using balances to make it all relevant) which gives a comparable cost of €125,500.

Now compare the two, €125,500 less €121,300 gives you €4,200 over 25years or €168 a year which is €14 a month. We still don’t have total comparitives because the person who bought might put their savings to work (or not) but you get the idea. A 10% drop in price doesn’t necessarily make you 10% better off, it’s more like 3% better off but could be less depending on how the first person uses the improved cost (for instance if they make an extra mortgage payment). It isn’t ‘you versus the system’ or other people, it’s you versus you so do these sums before taking on any large debt.

You can also use the calcultor we designed to do this for you, it’s over at MyHome.ie (rent or buy calculator)

Comments

  1. Dave Flanagan

    One small thing. Their deposit won’t decrease while they wait.It should be a fixed amount rather than a percentage.

  2. @Dave,

    Fair point, the difference in that case is 2k from my figures which would throw out the final figure because it would be €106,799 for the interest which instead equates to c.€120,000 instead of €121,300 so the ongoing difference is €5,200 over 25yrs and works out at 208pm or €17 a month.

    And before you mention it, I’m not applying interest to the buyer or seller in the savings/waiting periods!

  3. Brendan Hussey

    I think you are forgetting that the amount of interest paid on a mortgage each year reduces with each payment of capital and Int (unless it is an int only mortgage). Therefore even in the 1st yr the amount of interest paid is not €8100 but about €7,850. It then falls to about €7,700 the following year and so on. This obviously means the amount of tax relief also falls with each year that goes by. You have used 25% int relief on 8,100 for each of the first 2 years and 22.5% on each of the 3rd and 4th when by the 4th year the actual amount of int paid over the 12 mths will be about €1,600.

  4. @Brendan

    I’m not sure I follow, I was using an amortization calculator, your figure of €1,600 seems very low for the total interest paid in year three, how did you calculate that?

  5. Tara

    Is the gain doubled for a couple? Does it matter that they’re both paying money on the same mortgage? Or is it looked on as they pay half the mortgage each? Would that not mean the overall relief is the same for a couple as for a single buyer?
    It seems strange to me that two people could claim tax relief on the repayments on the same property.
    If one spouse is at home would they both get the relief?

  6. Tara

    Karl, can you do the sums on this one?
    If a house is 350k now by how much would the price have to fall to negate the benefit of the mortgage tax relief?
    For single buyers and joint buyers.

  7. @Tara

    It depends on the interest rate you apply – is this a random question or are you a client of our firm? If it’s the latter then email it to your consultant and I’ll do the sums with the precise amounts for you.

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