Government extended mortgage tax break against expert advice

Pre-budget submission warned continuing mortgage interest relief scheme could discourage banks from lowering interest rates and simply boost their profitability

Then-minister for finance Paschal Donohoe approved a two-year extension of mortgage interest tax relief in last year’s budget against the advice of Department of Finance officials.

The Government extended a mortgage tax break despite officials advising it had no clear policy rationale and it risked pushing up house prices.

A pre-budget submission warned continuing the scheme could discourage banks from lowering interest rates and simply boost their profitability.

Despite the advice, then-minister for finance Paschal Donohoe approved a two-year extension of mortgage interest tax relief in last year’s budget.

The temporary relief had originally been introduced on a one-year basis to help homeowners hit by successive interest rate rises.

However, in advance of last year’s budget, Department of Finance officials recommended it not be extended.

It said: “As was outlined by officials in advance of its introduction and its further extension, there is no clear policy rationale to support this relief.

“The available research, including that produced by the [Central Bank] and the OECD, has highlighted the negative implications of both the introduction of such a relief and its extension beyond one year.” 

A memo from the Central Bank said it represented a “poor use of taxpayer funds” and could not be targeted to those who needed it most.

It warned in many cases those benefiting from the relief were not “under [financial] stress” and were generally in higher-income groups.

Officials warned as well a further extension could be “taken as a signal to its long-term future” just as other cost-of-living measures were phased out.

The submission said:

An extension may increase the incentive for lenders to increase interest rates or delay the pass-through of interest rate deductions, in the knowledge that Government relief will soften the effect of higher interest rates on borrower repayment capacity.

“Therefore, the relief could act to support lender profitability without necessarily helping borrowers as intended.” 

Low uptake of scheme

Officials also pointed to the relatively low uptake of the scheme compared to initial expectations.

They said about 52,000 taxpayers claimed the relief in 2023 at a cost of €35.4m, well below earlier estimates of more than €120m.

The figures suggested the measure had not been used by the majority of eligible mortgage holders.

They said it remained unclear why there was such a significant gap between projected and actual levels of take-up.

The submission detailed how the tax break was introduced at a “unique time” of rising mortgage rates and widespread inflation.

Officials said the Government had given significant support to mortgage holders facing difficulty while encouraging people to switch to better rates.

It said the relief had been the subject of “external scrutiny and negative commentary” because of its costs and how arbitrary its conditions were.

“As evidenced by the withdrawal of the other temporary cost-of-living measures introduced in the same period, inflationary pressures have now reduced considerably,” the document explained.

It concluded the relief, which applied to the tax years 2023 and 2024, should not be extended any further.

A note from Paschal Donohoe said: “Have now decided to maintain in value for ’25 and ’26 and then phase out.”