Get on property ladder before year-end and you'll save thousands with tax relief
SINCE Budget 2011, the exemption from stamp duty for first-time buyers is no longer available. First-timers will now have to pay stamp duty like all other purchasers at 1pc of the purchase price where the price is less than €1m.
However, while the first-time buyer may have to come up with €3,000 to cover the stamp duty on a €300,000 purchase, all is not bad news.
The good news is that for first-time buyers, a potentially valuable entitlement to mortgage interest relief is still available at the prevailing rates.
First-time buyers should be aware that if they buy their home by December 31, 2011, they could end up paying as much as €25,200 less in mortgage repayments over a seven-year period compared to the same purchase should it occur in 2012.
This is a considerable saving and lessens the impact of the stamp duty changes.
Tax relief for mortgage interest (often referred to as Tax Relief at Source -- TRS) is tax relief given to mortgage holders based on the amount of interest that they pay on their home loan (subject to qualifying criteria). The mortgage interest relief is given at source by the homeowner's lender, either in the form of a reduced monthly mortgage payment or a credit to the mortgage account.
To qualify for TRS, the loan must be a 'qualifying loan'. The first-time purchase of a house is deemed to qualify for such relief. Tax relief is available to all those who make a qualifying purchase but an increased amount of relief is available for first-time buyers.
Tax relief is available for up to seven years after the taking out of the mortgage. The maximum qualifying interest amount for a first-time couple is €20,000.
In year one and year two of purchasing, the maximum interest relief is 25pc of €20,000, ie €5,000 annually. This relief reduces to €4,500 in years three, four and five and to €4,000 in years six and seven. Based on the above figures, for the first two years you can receive a reduction in your monthly mortgage repayment of €416.67. Obviously this is of considerable help in reducing one's monthly repayments, especially with ECB rate rises on the horizon.
For purchases made after December 31, 2011, the amount of relief available for qualifying first-time buyers is greatly reduced.
The maximum qualifying interest amount will be €3,000 annually, with relief at a rate of 15pc for each of the seven years. This results in maximum tax relief of €450 annually, ie €37.50 per month.
This is €25,200 less than a couple could receive, over a seven-year period, if they had purchased their house before January 1, 2012.
In other words it means that a couple who purchase a home up to and including December 31, 2011 could be in line to qualify for up to a massive €31,500 over a seven-year period.
However, a couple who completes their mortgage and home purchase just one day later, on January 1, 2012, will receive a maximum benefit of just €6,300 over the same seven-year period. (I have based the above figures on the mortgage interest relief available to a couple who are first-time buyers.)
Different rates apply for single, widowed and home buyers who have already bought their first house. First-time purchasers should be aware that should they move out of their home then the loan no longer qualifies for tax relief at source. Also, if you rent out the home and fail to notify Revenue of this change, then a potential clawback of the TRS can occur, which can be a very expensive oversight.
Note: the new Programme for Government proposes to increase the rate of relief to 30pc for first-time buyers who took out mortgages in the period 2004-2008, as well as abolishing relief for new buyers from June 2011.
Simon Ball is an associate of the Irish Taxation Institute and is the principal at SB Tax Consultants. www.sbtaxconsultants.com