Maybe you've heard of the United States' Home Mortgage Interest Deduction, wondered how negative gearing works, or just caught wind of the Coalition's election pitch. No matter why the topic came across your desk, it's one that's worthy of exploration. 

It's also the question I was challenged to answer on ABC Radio Adelaide's Producer's Challenge – a segment where producers have just an hour to find an expert to answer a listener's query.

While I managed to cover some key arguments for and against making mortgage repayments tax-deductible – perhaps the most impactful being that Australia's retirement system is built upon the presumption that a retiree owns their home – the complexity of the issue doesn't quite fit into a few minutes of radio airtime. And frankly, a mere 40-minute scramble doesn't allow enough prep time to do the topic justice.

So, I've put pen to paper. With a bit of gusto and a fist full of opinions, I'm delving into the case for and against tax-deductible mortgage repayments, the Coalition's policy proposal, investor tax incentives, and how it all fits into our retirement system.

Homeownership, super, and retirement: The Australian equation

To understand why mortgage tax deductibility arguably should be on the table for owner-occupiers, we need to look at how Australia's housing and retirement systems intersect.

Homeownership isn't just a personal milestone here – it's a cornerstone of our financial aspirations. Our retirement system is built on the assumption that you'll own your home outright by the time you stop working.

Let's look at the financial lifecycle of an Australian worker.

Many of us start earning as teens – whether stacking shelves, doing trades, or working weekend shifts. For most, this is when we first receive superannuation contributions. From there, that super balance slowly builds, with the goal of being accessible when you retire and after preservation age or when you turn 65. Here's what that growth looks like across a lifetime, according to 2021-22 ATO data:

Of course, there's a clear gender divide – driven by both the pay gap and the long-standing expectation women will step back from paid work to raise children. But even beyond that, those super balances likely aren't enough to sustain someone through decades of retirement.

Australia's super system operates on the assumption that retirees own their homes

Where this discussion returns to the idea of tax deductible home loan repayments is in the assumption that a person will own their home when they retire.

An Aussie aged 65 to 84 who owns their home outright needs at least $100,000 in super and access to the aged pension to afford a 'modest' retirement – one that allows for basic health insurance and infrequent exercise, leisure, and social activities – which costs $33,000 to $52,000 per year. A 'comfortable' retirement – one that offers a good standard of living and a few holidays – costs between $47,000 and $73,000 and demands a super balance of $595,000 for singles and $690,000 for couples, according to the Association of Superannuation Funds of Australia's latest costings.

Factoring in market-rate rent (the median weekly rent across Australia was $654 per week, or $34,000 per year, in the first quarter of 2025), likely leaves little to no room in most retirees' budgets, even with rent assistance.

All that is to say, owning a home is almost as important for a happy retirement as superannuation is. And yet, the government encourages us to make superannuation contributions by dangling a carrot of lower taxes, while home loan repayments are borne in their entirety by the person making them. What gives?

But … Property investors can deduct income expenses, right?

Equality is central to this conversation. Much of the debate centres on access to the housing market, and when it comes to tax, investors are encouraged to buy housing while first home buyers are often left out in the cold.

In all that, around 20% of tax payers – 2.2 million Australians – declared rental income in the financial year 2021-22. Meantime, nearly four in ten home loans signed in late-2024 were taken out by an investor, up from between approximately 30% to 35% from late-2019 to the end of 2023, according to the latest Australian Bureau of Statistics data. That highlights a divide between the property 'haves' and 'have-nots', likely exacerbated by available tax concessions.

The cost of home loan interest is just one expense property investors can deduct from their taxable income. Even if their property runs at a loss, investors can deduct that loss from their other taxable income. When they do it's called negative gearing.

Another tax consideration for property investors is capital gains tax (CGT). When an investor sells a property for profit, their proceeds are added to their taxable income for that financial year. Though, if they've held that property for more than 12 months, only 50% of the proceeds are considered taxable.

It's also worth noting that Australia is in the midst of a productivity crisis. We battled our way through a 21-month-long per capita recession over 2023 and 2024.

The amount of our household wealth we invest in housing, as opposed to productive businesses, means we're on the back foot when it comes to productivity.

As AustralianSuper CEO Paul Schroder told The Australian Financial Review Business Summit this year, "all we've done is just poured all this money into houses … and then sold it on to someone, which has deprived the economy of heaps and heaps of productive capital".

It's also made it harder to enter the property market than ever before. The allure of housing wealth – polished by tax breaks – has become a real economic concern.

First home buyer interest deductions: The nitty gritty of the Coalition's proposal

I guess that leads us to dissect the Coalition's proposal to allow first home buyers who build or buy a new home to deduct their income expenses.

At the time of writing, the policy looks unlikely to be enacted – Labor has the lead in the polls – but the appeal is clear. Tax deductions can help save money and boost borrowing power, and that promise alone may be enough to sway some aspiring buyers.

The Coalition also wants first home buyers to be able to withdraw up to $50,000 from their superfund to use as a deposit on a home loan. Critics say that would rob first home buyers of their retirement funds, instead enriching property-owning boomers and banks – the likely recipients of super-funded deposits.

Less shade, however, has been thrown at the party's newest housing policy: to allow eligible buyers to deduct the interest costs on up to $650,000 of their home loan for the first five years.

According to the Coalition, a first home buyer earning $120,000 per year and paying 6.1% interest could save around $12,000 in tax in year one.

But the scheme is both regressive and selective. Higher-income earners stand to benefit most, as they have more income to offset, and only a narrow slice of future buyers would qualify. Worse, it would likely push house prices higher as banks incorporate tax savings into serviceability calculations, enabling buyers to borrow more and spend more.

History suggests that injecting more money into first-home buyer schemes – be it through grants, subsidies, or super withdrawals – tends to inflate prices rather than improve access. This only sets the cycle in motion again: rising prices, shrinking affordability, more support, repeat.

The global evidence: does mortgage interest deductibility work?

If this policy sounds familiar, it might be because the United States has offered a mortgage interest deduction for decades (though, it was scaled back by President Donald Trump in 2017).

US homeowners who purchased their property after late-2017 can deduct interest charged on up to US$750,000 of their mortgage from their income tax. Those who bought before late-2017 can currently deduct the interest costs on up to US$1 million worth of mortgage debt.

The policy, due to various factors, disproportionately benefits wealthy individuals and can't be proven to have contributed to homeownership rates. It's also incredibly expensive, causing the US government to miss out on around US$30 billion of revenue in recent years. Finally, some say it encourages people to take out larger home loans, thereby increasing both the risk to them and that of a major event such as the Global Financial Crisis (GFC).

It's a similar story in the Netherlands, where mortgage deductibility schemes are said to have driven up house prices without providing significant benefit to homebuyers.

Could fewer tax breaks, rather than more, be the answer?

Now comes the inevitable question: With all things considered, should we either disallow property investors from deducting investment property costs or let owner-occupiers deduct housing costs?

Well, there's not an easy answer. Let's argue the first suggestion.

If we're serious about tackling housing affordability, productivity, and intergenerational fairness, maybe the question isn't why can't we deduct mortgage repayments, but why are we still subsidising property investment so heavily in the first place?

Reforming negative gearing, capping CGT discounts, or introducing broad-based supply-side measures could do far more to restore balance – for buyers, renters, and the economy.

On that, it's worth noting that owner-occupiers do receive tax benefits over investors, in the form of CGT exemptions. A person's home is also disqualified from the aged pension asset test (this also means there's often little incentive for older Australians to downsize, which could free up housing stock).

At the same time, investment in housing is often thought to boost supply. The logic goes: more investors = more demand = more properties built. And if those investors become less reliant on the pension later in life, so much the better – at least, according to the theory.

On the second suggestion: The tax system simply isn't designed to allow you to deduct your personal costs from your taxable income.

Property investors are investing in property to grow their wealth – like they might a business. In both cases, costs borne from that investment are tax deductible in an effort to make the inherent risks more appealing.

Not to mention, if everyone is allowed to deduct the cost of interest from their taxable income, the change would likely push up house prices and shrink government coffers – neither of which is particularly helpful.

Ultimately, I think it simply comes down to one fact: Housing in Australia is too expensive. We're forced to put too much of our wealth into the property market, making policies like those proposed by both parties this election understandably attention grabbing. A huge portion of us struggle within the housing market – take it from me, a recent first home buyer.

But no politician in their right mind would campaign on a promise to cut house prices. After all, that would leave investors undone and many owner-occupiers in negative equity (myself included).

Our nests have become our nest eggs – whether that was the plan or not. Really, the only long-term solution seems to be increasing the supply of housing. If only that were simple.

Image by William Warby on Unsplash

Collections: