Tuesday 17 July 2018

That's a relief

Charlie Weston

Charlie Weston

AN estimated 125,000 people with their first homes are set to benefit from changes in mortgage interest relief announced in the Budget.

This is because the amount of mortgage-interest payments that first-time buyers can claim tax reliefs on has been doubled.

The amount of interest first-timers can claim on rose from ?4,000 to ?8,000 for single people, and from ?8,000 to ?16,000 for those married or widowed.

What this means is that from January a couple with a mortgage of ?379,000 over 33 years at an interest rate of 4.25pc will gain up to ?1,600 per year or ?133 per month.

But how exactly is mortgage interest relief calculated? Mortgage interest relief is essentially a tax refund that can be claimed by home buyers who have a mortgage on their home.

Tax relief

The tax relief available to owner-occupiers is limited to a maximum amount of interest. Crucially, the relief is only allowed at the standard rate of tax, which is 20pc.

The tax relief is given at source (TRS or tax relief at source). In other words, your bank or building society should deduct the tax relief from your monthly payments.

However, this relief is only given at source if the Revenue Commissioners know of your entitlements. So make sure you are getting it.

A first-timer couple can get mortgage tax relief on annual interest of up to ?16,000 a year. You can claim this at the standard rate, which works out at ?3,200 (?16,000 X 20pc = ?3,200).

This assumes you're paying ?16,000 interest or more on your mortgage in the year, which in turn assumes your mortgage is ?350,000 or more at a sample interest rate of 4.5pc, according to Liam Ferguson of brokers www.ferga.com.

For a single first-time buyer, the new maximum in annual interest payments you can claim has doubled from ?4,000 to ?8,000. This works out as saved tax of ?1,600. On a monthly basis, the tax relief is worth ?133 for a single first-time buyer.

The new allowances affect not only people about to purchase their first homes, but those who are still in the first seven years of their mortgage. If you bought your first house in 2002, you will qualify for the mortgage interest relief in 2007 and 2008.

You retain your first-time buyer status even if you change house or change mortgage provider within seven years. And you retain that status if you re-mortgage and as long as the extra money is used for work on your private residence, according to tax director with Ernst & Young, Aileen Downes.

According to Mr Ferguson of ferga.com, the changes in mortgage interest relief wipe out the impact of two to two and a half of the last six interest-rate rises over the last year. He worked this out on the basis of a ?350,000 mortgage over 30 years on a tracker (the European Central Bank rate plus 1.1pc).

This tracker rate would have risen from 4.35pc to 4.6pc following this month's ECB rates rise.

Annual interest on a loan of this size on that interest rate would amount to ?15,984. In this case, a first-timer couple would get tax relief of ?3,200 for the year or ?266 a month. A single first-time buyer would get monthly relief of ?133.

Maximum allowable interest in a year, for tax-relief purposes, is ?16,000.

Saving

So the couple would save ?266 a month, the equivalent of two and a half of the ¼pc interest rises we have had. This amounts to a wiping out of between 0.6pc and 0.7pc of the interest rate applying to a mortgage. That's a good saving.

Mr Cowen is also raising the ceiling on interest relief for non-first-time buyers from ?2,540 to ?3,000 for a single buyer, and from ?5,080 to ?6,000 for married mortgage holders.

This works out (after multiplying at 20pc) at ?600 a year or ?50 a month for single buyers, and ?1,200 a year or ?100 a month for couples.

If you are not receiving your mortgage-relief entitlement, fill out Revenue form TRS 1, giving your PPS number and your mortgage account number.

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