With mortgage relief ending, should you buy now?

IN its pre-election manifesto, Fine Gael promised to raise the tax relief to 30% for those who bought at the top of the housing market between 2004 and 2008.

It was to be partly funded by abolishing tax relief for all new buyers from mid-2011. The promise was transposed into the joint Programme for Government as something to be considered rather than definitely implemented. So far, it hasn’t happened, although some change could be announced on budget day.

As it currently stands, tax relief is to be abolished for loans taken out from January 1, 2013 and will be greatly reduced for mortgages taken out during 2012. It’s unlikely that will be changed, although with house prices still falling that may not provide much extra incentive for buying now rather than waiting. But for those who have decided to buy, there is an advantage in doing so now rather than waiting for the new year.

The tax relief is allowed in respect of the interest on loans taken out to buy, maintain, or improve the taxpayer’s principal residence, the residence of a former or separated spouse, or the residence of a dependent relative (other than a child) who is living in the house rent-free. There is an upper limit on eligible interest for first-time buyers during the first seven years — it is €10,000 for single taxpayers; and €20,000 for married couples, widows and widowers.

Since January, 2009, first-time buyers get tax relief at 25% of eligible interest paid during the first and second years, and at the rate of 22.5% during the third, fourth and fifth years. Tax relief in the sixth and seventh year is given at the standard rate of 20%. From the eighth year onwards, home buyers, who are, at that stage, defined as non-first-time buyers, are allowed tax relief at the reduced rate of 15% and only on a maximum of €6,000 a year (married and widowed) and €3,000 (single).

Those who took out qualifying loans after January 1, 2004 will continue to get the relief until the end of 2017. But those who first claimed the relief during 2003 or earlier only got the relief for a maximum of seven years. It’s the number of tax years that matters. Someone who took out their mortgage in October, 2003, and claimed tax relief in that year, ceased to be eligible for relief at the end of 2009, having got the relief during seven tax years.

It’s not possible to requalify by simply switching lenders. But it is possible to start again on a top-up mortgage, provided the money is spent on qualifying work, such as structural improvements or extensions to your home.

Switching lender or mortgage type to achieve a better interest rate is not the same as taking out a new loan. However, a new mortgage, where you move home and take out a mortgage with a new or existing lender, is eligible for relief up until the end of 2017, provided it is taken out before the end of 2012.

You are considered a first-time buyer for seven years from the time you first claim the relief. In effect, you get tax relief as a first-time buyer for a maximum of seven tax years. If you first claimed in 2005, you are still considered a first-time buyer in 2012.

This will remain the case for those taking out mortgages this year. Under the current rules, their seven years as first-time buyers will extend up to, and include, 2017 and they will get tax relief at those rates outlined above. But there will be no tax relief for anyone from 2018 onwards.

New rules are going to apply to those taking out mortgages during 2012. Provided they meet the other qualifying conditions, they will get tax relief up until the end of 2017, but at reduced rates. If they qualify as first-time buyers, the relief will be granted at 15%. Other borrowers will get the relief at 10%. The maximum interest payments on which the relief can be claimed will be €6,000 in the case of married couples or widowed claimants, and €3,000 in the case of single claimants.

The tax relief is normally granted at source i.e. by way of a reduction in the repayments to the mortgage lender, so it is important to ensure that the lender has been authorised by the Revenue to provide the relief. It is also important to ensure that your tax office has the full details of your mortgage account. If it hasn’t been allowed at source, of course, you can claim it.

Where a taxpayer moves house and there is a delay in selling the original house, both houses can be considered to be the sole or main residence for up to one year. During that year the interest on any loan taken out to buy the new house is allowed for tax relief in addition to the tax relief on the old loan — the limit is doubled.

Owners of investment residential properties can still claim tax relief on 75% of their interest payments. Such interest is viewed as a business expense to be set against rental income. There is no definite proposal to abolish it and any reduction would be a severe blow to many people who bought investment properties at, or near, the top of the boom.

There are some other reliefs apart from the basic relief on investment properties mentioned above, some of which apply to owner-occupiers. Their continuation must be in doubt, although in the current climate they are possibly not costing the Exchequer much in lost revenue. There are capital allowances available to investors who own residential property in certain designated areas, and there is additional tax relief for owner-occupiers of homes built or refurbished in certain designated areas.

These areas include the Upper Shannon Region Rural Renewal Scheme, which covers all of Co Leitrim and Co Longford and parts of Co Cavan, Co Roscommon and Co Sligo. Also covered are 100 designated small towns. To qualify, the property must be the sole or main residence of the individual claiming the relief. If it is a converted premises, there must be a certificate of reasonable cost obtainable from the Department of the Environment. Properties must be of a minimum size.

In these cases, tax relief is allowed each year for 10 years on 5% of the construction cost in the case of a new premises, and 10% in the case of a refurbished premises. For example, the construction costs of a new apartment selling for €280,000 might be about €180,000. The buyer is entitled to claim tax relief on 5% of that for 10 years. So, relief is allowed on €9,000 a year. That relief is in addition to any mortgage tax relief calculated on the basis outlined above.