Scrapping mortgage interest deduction can be less drastic if handled slowly, experts say

Abolishing the mortgage interest deduction will be less drastic than many fear, according to financial services provider Van Bruggen. Mortgage expert Thomas de Leeuw of Frits Hypotheken agrees, especially if the tax benefit is phased out slowly. De Leeuw suggests gradually decreasing the deduction to zero over a period of 15 years.

Several parties, including GroenLinks-PvdA and CDA, have scrapping the mortgage interest deduction in their election programs. De Leeuw previously said that the measure was “inevitable and even desirable in the long run,” but added that it could be disastrous for new homeowners if it's done quickly.

Van Bruggen calculated the consequences of phasing out the mortgage interest deduction over 15 years. With an annuity mortgage of €363,000, the average mortgage amount for first-time buyers this year, the net mortgage payment under the current rules would rise from €1,255 in the first year of the mortgage to €1,338 in year 10.

If the deduction is phased out, the amount would be €1,560 in year ten. “That’s an additional increase of €222 over 10 years. So, per year, it’s an increase of about €20 per month compared to the current situation,” Van Bruggen said, according to ANP. “Incomes are growing faster in practice.

De Leeuw agrees. “Due to inflation, incomes rise by an average of around 3 percent per year. This automatically reduces the monthly mortgage payment. Spreading the reduction over 15 years will absorb most of the higher costs,” he said to ANP.

The other risk would be if the mortgage interest deduction disappears at the same time as a fall in home prices. “And we’re already seeing the first sign of a slowdown in Amsterdam,” De Leeuw said. If the two things coincide, “first-time buyers could find themselves up to €50,000 more underwater.”

But here, too, a long phase-out period will help. “By spreading the phase-out of mortgage interest deductions over 15 years, we reduce the risk that any decline in value caused by this measure will coincide with a housing market crisis and thus cause devastating damage,” De Leeuw said.

“It is clear that mortgage interest deductions must eventually be phased out. The scheme drives up prices, primarily favors higher incomes, and ensures that banks are the biggest winners,” De Leeuw said. “However, the reform must be carefully managed. A concrete 15-year path gives homeowners certainty and keeps the market stable.”