Mortgage Tax Benefits

Something that may come as a pleasant surprise to the first time homebuyer is the fact that the interest payments on their mortgage are tax deductible. Of the many tax benefits available to mortgage holders, this is probably the most important.

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So how does this tax benefit affect you as a homeowner? Well, let’s take a look at this simple example:

Your mortgage = $200,000

Paid over = 30 years

Interest rate = 6%

On those figures, your monthly repayment would be $1,191.10. Now, let’s say you’re in the first year of your mortgage, so the majority of your payments are going towards the interest, while you take only a small nibble out of the principal. So, your annual repayment would be almost $14,300, of that, around $11,930 would account for the interest, while only $2,370 is paid on the principal.

Now, in this first year you could claim that $11,930 as a tax deduction. When you get down to brass tacks that would cut $2,982.50 from your annual tax bill if you’re in the 25% bracket. We’re not talking pocket change here.

So suddenly we’re seeing that mortgage tax benefits effectively reduce the interest rate on your mortgage. While you still have to pay the interest at source, you can claim back a portion of them in your tax return. When applied to the total life of your mortgage it becomes clear that this tax benefit can have a huge impact on your finances.

Based on the above example, the total interest due on the mortgage over thirty years would be $231,676. When adjusted to take account of the tax deduction, the total interest on the mortgage suddenly plummets to $173,757 (again, based on the assumption that your income is in the 25% bracket).

So, when calculating the cost of a mortgage you should take into account the effect of the available tax benefits. Most importantly, of course, you should consult a tax specialist to ensure that you are getting the most out of your mortgage.