Did the settled generation of over-45 homeowners really need mortgage interest relief?

When you’ve got €14 billion to play with, you can tick a lot of boxes. The budget spread the cash widely across society – an assessment by the Economic and Social Research Institute shows that, in terms of the general measures, the less-well-off did best. This is largely because the cash payments, many of them once-off, are a bigger income boost for these households than for the better-off. In terms of hard cash, significant amounts were directed at middle-income households – no doubt seen as core voters by the Coalition – some of whom will benefit by €3,000-€4,000 over the next year.

Such is the strength of the public finances that Minister for Finance Michael McGrath and Minister for Public Expenditure and Reform Paschal Donohoe could do all this and still unveil a plan to put money into two new funds. This is a wise move, though you would suspect battles lie ahead here if the exchequer finances tighten, as they surely will at some stage, and the Government of the day is forced to choose between contributing to the funds and the normal budget fare of tax reductions and money for pensioners and those on welfare.

For now, the political advantage for the Coalition is that living standards should rise a bit on average next year, having been hit by the cost-of-living crisis over the past two years. This should happen pretty much across the board, though of course how good you feel about this depends on where you are starting from. And the squeezed renters – who got a welcome if limited €250-a-year tax credit hike – and younger first-time buyers, already under financial pressure, are likely to feel a bit miffed about one budget measure. This is the return, albeit, we are told, for one year only of mortgage interest relief.

[ Mortgage interest relief – who is not getting it and why? ]

[ Some will ‘fall on wrong side’ of new mortgage interest relief scheme, says Minister ]

This is aimed squarely at those on tracker mortgages who, by definition, have owned their homes since at least 2008, when these loans stopped being offered and will thus generally now be over-45s. They have suffered the biggest jump in repayments as increases from the European Central Bank are passed on directly to tracker holders, often costing an extra €3,000-€4,000 annually in repayments. Some 160,000 will qualify for the new relief, because they meet the criteria of having made higher repayments in 2023 than 2022 – so will some variable rate mortgage holders, though in most cases they have experienced lower level of increases. (A smaller group of variable rate mortgage holders who are paying particularly high rates after their loans were sold to international funds will also gain – and few would begrudge them a few euro.)

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But while helping established householders – typically well into their mortgage term – the measure does nothing for someone who bought a house at current high interest rates this year. It will be of some benefit to a borrower coming off a fixed rate this year – particularly early in the year – but provide no help to one doing so from January 1st on. And with about 70,000 due to come off fixed rates each year, a lot of people are involved here. They, too, will face increases averaging €3,500 a year but unless they meet the criteria of having made higher repayments in 2023 than 2022, they will get nothing.

Given that most fixed-rate deals are between three and five years, this group includes many younger housebuyers in their 30s or early 40s who have scrambled into the market with relatively large loans in recent years and are going to find the transition to current market interest rates difficult.

These newer buyers can also point to the advantages which tracker holders have had over the years. While some also bought at high prices before the 2008 crash, many were paying at interest rates of 1-1.5 per cent until the ECB started to move in summer 2022. Research by the Central Bank has shown that, on average, the repayments being made by this group, which were well below the average for years, will only have caught up with other borrowers during 2023. This is not to deny the financial pressure that higher interest rates will bring in some cases. But the relief will also go to thousands of borrowers who don’t need it because they have decent incomes and are well into their loan terms.

[ Budget 2024: ‘Tailored’ mortgage relief could easily unravel on Government ]

[ Average interest rate on new mortgage rises again in August ]

Specific tax reliefs like this are notorious money wasters and there is always pressure to extend and widen them. And there is a suspicion here that the Coalition’s heart is not entirely in this one. It looks like a manoeuvre to try to close off a route of criticism from Sinn Féin, who have for months been calling for a wider, though also temporary, mortgage interest relief scheme. The risk for the Government, however, is in the message it sends to younger voters, which is that the settled generation who have the ear of politicians are again getting a special digout.

It would have been better to avoid this one entirely. And it raises a question central to budget policy, which is what exactly is the appropriate role of the State? Covid-19 and the energy crisis have led the public to expect protection from financial hits – and policy through these crises has been pretty well-judged. Households needed the help and Ireland emerged with a budget still in surplus.

The mix of permanent and once-off measures in this budget will again help families. But the question is whether the once-off payments and reliefs will become semi-permanent – when affordable – and deployed from year to year in different ways? Or whether the State needs to move back to a more “normal” budget policy, focused more on permanent changes and a tighter, more strategic focus?

In uncertain times, the answer is not straightforward, though once-off measures are by definition never a longer-term solution. And the universal ones are costly. The energy credits in this budget will cost €900 million. As the budget numbers tighten, as they will at some stage with big climate and ageing bills on the way, the trade-offs in deciding budgets will get a lot trickier. Unless the corporate tax bandwagon keeps rolling – and it is hard to see the growth rate continuing – whoever is in power will have less scope on budget day. If €14 billion extra is to be spent in future budgets, the likelihood is that much of it will need to be raised through higher taxes.