Household Leverage and the Deductibility of Home Mortgage Interest: Evidence from U.K. House Purchasers

Patric H. Hendershott, Gwilym Pryce and Michael White

Journal of Housing Research, 2003, vol. 14, issue 1, 49-82

Abstract: Home mortgage interest deductibility has been phased out gradually in the United Kingdom. First, a ceiling was set on the size of mortgages eligible for interest deductibility. Later, the maximum rate at which interest under that ceiling could be deducted was reduced in four steps to zero. The combination of these changes gives a rich array of debt tax penalties for different households in different years. We analyze the effect of this penalty on more than 117,000 loans originated in the United Kingdom during 1988 to 1998 to finance home purchases.Removal of deductibility is estimated to reduce initial loan-to-value ratios of unconstrained purchasers (and mitigate the rise in their weighted average cost of capital) by 30 percent. The reduction varies with household age, loan size, and tax bracket. Given the minimal response of constrained borrowers, the aggregate response is about half that estimated for U.S. data.

Date: 2003
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DOI: 10.1080/2167034X.2003.12461360

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