Families Who Transfer Mortgage to New Bank Lose Right to Tax Deductions

22 October 2017

Transferring a mortgage to a different bank “corresponds to the creation of a new contract”

Families who borrowed to buy a home before the end of 2011 may still be able to write off a portion of the interest on their income tax declaration. However, if they transfer the mortgage to another bank in search of better terms, they will lose the right to the tax deduction. This was Tax and Customs Authority’s (AT) response to a request for binding information from a taxpayer, as the government authority concluded that the transfer of the mortgage to another banking entity “corresponds to the conclusion of a new contract.”

“If there is a transfer of the mortgage credit to another bank, which corresponds to the conclusion of a new credit agreement, the taxable person cannot benefit from the provisions of Article 78 E [deduction of charges for immovable property] of the IRS Code, since it will occur on a later date than that legally established for that purpose,” the AT stated.

This explanation also points to why a lower number of households reported having home purchase expenses on their IRS statement in 2015. 1.1 million reported the costs in 2008, but the number fell to 1.07 million family aggregates in 2015.

The transfer of mortgages from one bank to another has gained relevance in recent years, reflecting the dynamics of the real estate market. After years of tightening credit, banks are once again more interested in lending money and the campaigns that accentuate the benefits of each banks’ offerings – the spreads and costs associated with the loans – have returned.

The importance of charges relating to home loans on deductions from the income tax collections has dropped significantly from 2012 onwards. Until then, it was possible to deduct 30% of loan charges for the purchase of permanent housing for personal use up to a limit of 591 euros. The limit was increased by 10% in properties with an energy rating of A or A+.

The limitation of this deduction was one of the measures outlined under the financial adjustment program Portugal had to undergo after requesting external assistance from the IMF, the ECB and the European Commission (the troika). The deductible limit was not only sharply reduced, but the kinds of charges that could be deducted were limited as well (the amortisation was no longer deductible). Also, only loans contracted by the end of 2011 are still deductible.

Currently, it is possible to deduct up to 15% from income tax payments for amounts spent in interest on loans for purchase, construction or improvement of real estate up to the limit of 296 euros. On the other hand, rented properties received better treatment, with a deduction of up to 502 euros per household. This measure addressed two of the troika’s concerns: reducing the share of the state’s fiscal expenditure and discouraging the purchase of homes at a time when the level of household indebtedness was at its highest.

Falling Deductions

The statistical data available account for the effect of this change. In 2008, when Euribor (the index used for most mortgages in Portugal) reached historically high peaks, around 1.1 million households reported real estate charges on their IRS and deducted a total of 580 million euros (see chart).

A year later, real estate deductions reached 562 million euros, and they remained above 500 million euros per year until 2011.

After that, fiscal expenditure associated with housing costs by households fell sharply, dropping to 230 million euros and, in 2013, to 182 million euros.

In 2015 (the latest year for which data are published by AT) expenditures were reduced further to 169 million euros. Two factors contributed to this fall: the loss of the exemption on the part of families who transferred their mortgages or sold their home to buy another, and the reduction in interest as a portion of monthly payments, as rates are at historic lows.

Original Story: Diário de Notícias – Lucília Tiago

Photo: Orlando Almeida / Global Imagens

Translation: Richard Turner