Mortgage Interest Deduction Needed

2 out of 3 Canadians will have trouble financing their retirement according to a Canadian Institute of Actuaries (CIA) report.  People are simply not saving enough.

As a result, the CIA recommends making interest on principle home mortgages tax deductible.  The government could then encourage people to invest those tax savings for their retirement.  Doing so would likely boost savings rates as well as equity in Canadian homes.

According to the CIA this makes sense because, “for a significant portion of Canadians, the adequacy of their retirement income will be dependent on the value of their home’s equity.”

Read the full report here.

 

Side Note:  The Canadian Capitalist questions two of the reports assumptions.  Here’s his view.

  1. I don’t understand the logic behind making the interest tax-deductible (not that I would mind), if people could write off their interest then it might encourage them to have bigger mortgages and not to pay them down.
    Mike

  2. I don’t understand the logic behind making the interest tax-deductible (not that I would mind), if people could write off their interest then it might encourage them to have bigger mortgages and not to pay them down.
    Mike

  3. Hi Mike,
    Thanks for the note. I think the idea is for the government to require the tax savings to be invested in a retirement account.
    If structured properly, this would prevent people from using that money to buy more home than they could otherwise afford.
    Economic research suggests that mortgage interest deductions do little to boost home ownership rates. Similarly, as evidenced by Britain’s experiment with an interest deduction, eliminating it has little negative impact on house prices long-term.
    A deduction in Canada therefore only seems logical (to me) if it were tied to a “forced” savings plan.
    Have a great day,
    Melanie

  4. Hi Mike,
    Thanks for the note. I think the idea is for the government to require the tax savings to be invested in a retirement account.
    If structured properly, this would prevent people from using that money to buy more home than they could otherwise afford.
    Economic research suggests that mortgage interest deductions do little to boost home ownership rates. Similarly, as evidenced by Britain’s experiment with an interest deduction, eliminating it has little negative impact on house prices long-term.
    A deduction in Canada therefore only seems logical (to me) if it were tied to a “forced” savings plan.
    Have a great day,
    Melanie

  5. The problem with tax measures like this is that they tend to get priced into the value of a house, which causes home values to rise, leaving no net increase for buyers. It’s effectively a transfer from the government to existing homeowners.
    With affordability already a problem in many markets, I’m not sure this would be advisable.

  6. The problem with tax measures like this is that they tend to get priced into the value of a house, which causes home values to rise, leaving no net increase for buyers. It’s effectively a transfer from the government to existing homeowners.
    With affordability already a problem in many markets, I’m not sure this would be advisable.

  7. I agree with four pillars. I think it’s a ‘quick fix’ to a problem that’s really stems from financial education. Instead of having the government allow tax write-offs for people who own homes, why not make it so that the amount used as your down payment (up to 25% of the homes value, but only over 10%) is tax deductible. That would be an interesting concept.
    How about instead of any of that, invest in financial education for the general public. When they realize how terribly they are doing saving, through education, maybe they will wake up and get a clue.

  8. I agree with four pillars. I think it’s a ‘quick fix’ to a problem that’s really stems from financial education. Instead of having the government allow tax write-offs for people who own homes, why not make it so that the amount used as your down payment (up to 25% of the homes value, but only over 10%) is tax deductible. That would be an interesting concept.
    How about instead of any of that, invest in financial education for the general public. When they realize how terribly they are doing saving, through education, maybe they will wake up and get a clue.

  9. Education is a dream fix, but it’s not practical.
    When faced with the choice of saving or spending, people spend much more often than not. It’s a discipline issue, and no amount of education is going to make people disciplined in this age of instant gratification.
    Instead of idealist plans, we need to leave people with no choice. Either they save, or it costs them–directly and immediately.
    Tying peoples tax savings to their retirement savings is the only thing that will compel people to think with their wallets and act intelligently.
    As for being priced into home values, I agree that would be the case if it were a U.S. style tax deduction. In this proposal, however, people wouldn’t pay more for their house because they’d be unable to use the tax deduction for several years. Thus, their cash flow would NOT improve in the present and allow them to pay up for a house.

  10. Great comments. Thanks to each of you.
    Education is one potential solution. Paul makes a good point about discipline, however–which can be hard to teach.
    Based on the mortgage apps I see every day, it seems to take a lot of tangible financial incentive to make people think long-term.
    That said, Al makes a critical point about keeping any incentives from inflating home prices.
    Enjoy your day,
    Melanie

  11. Great comments. Thanks to each of you.
    Education is one potential solution. Paul makes a good point about discipline, however–which can be hard to teach.
    Based on the mortgage apps I see every day, it seems to take a lot of tangible financial incentive to make people think long-term.
    That said, Al makes a critical point about keeping any incentives from inflating home prices.
    Enjoy your day,
    Melanie

  12. A good first step for people might be to read the book “Is your mortgage tax deductible?” by Fraser Smith. This is not for everybody, and only those who have good credit, don’t mid leverage and work with a certified financial planner and of course a mortgage specialist!

  13. A good first step for people might be to read the book “Is your mortgage tax deductible?” by Fraser Smith. This is not for everybody, and only those who have good credit, don’t mid leverage and work with a certified financial planner and of course a mortgage specialist!

  14. If I can borrow $50K against the equity of my house and was able to invest it in the stock market @ 10%. If I choose to re-invest the dividends in the stock market will that earn more to cover my mortgage faster than putting all the dividends against the loan annually? or to pay it off as soon as dividends are paid out?

  15. If I can borrow $50K against the equity of my house and was able to invest it in the stock market @ 10%. If I choose to re-invest the dividends in the stock market will that earn more to cover my mortgage faster than putting all the dividends against the loan annually? or to pay it off as soon as dividends are paid out?

  16. Personally it is my belief that we should not have a personal deduction, but instead I feel that our personal income tax should have the same allowable deductions as a buisness. Personal expenses are equally justifiable as buisness expenses are. We need to survive the same way a buisness does in order to make the government money. Without a vehicle, fuel, repairs, and a home to reside in we cannot make the government a cent. Instead they would have to support us (welfare). We cannot hold a job without a way to get to work, clothes to wear, etc. Is it right to be given a maximum allowable amount for the building we live in? Do buisnesses have a maximum allowable amount for their expenses? Even though we are an employee and not the employer, we should be allowed the same rights. Instead the employee just makes the rich richer and we give our lives to the government so that they can meet their expenses. What about ours?

  17. Personally it is my belief that we should not have a personal deduction, but instead I feel that our personal income tax should have the same allowable deductions as a buisness. Personal expenses are equally justifiable as buisness expenses are. We need to survive the same way a buisness does in order to make the government money. Without a vehicle, fuel, repairs, and a home to reside in we cannot make the government a cent. Instead they would have to support us (welfare). We cannot hold a job without a way to get to work, clothes to wear, etc. Is it right to be given a maximum allowable amount for the building we live in? Do buisnesses have a maximum allowable amount for their expenses? Even though we are an employee and not the employer, we should be allowed the same rights. Instead the employee just makes the rich richer and we give our lives to the government so that they can meet their expenses. What about ours?

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