Finance Ministry proposes temporary inclusion of mortgage interest payments in eligible expenses

  • 2023-09-25
  • LETA/TBT Staff

RIGA - In order to provide targeted support to those Latvian households that have experienced a significant increase in mortgage payments, one of the possible solutions might be the inclusion of loan interest payments in the eligible expenses for a fixed period - 2023 and 2024, says a draft letter prepared by the Finance Ministry.

The Finance Ministry also proposes a targeted support program of the Development Finance Institution Altum (Altum), which would enable capitalization of a part of the interest payments by attracting an additional guarantee from Altum and thus reducing the monthly payment. The ministry also calls for targeted assistance under the available social assistance instruments.

A letter from the Saeima Budget and Finance (Taxation) Committee called on the Finance Ministry and the Bank of Latvia to assess the situation on the financial market in relation to the rapidly rising EURIBOR rate, to find necessary solutions as soon as possible and to submit proposals to the Saeima committee.

According to the Finance Ministry, in addition to the already existing maximum amount of eligible expenses - EUR 600 - up to EUR 2, 000 worth of interest payments on mortgage loans per year could also be included in the eligible expenses of borrowers paying personal income tax. 

This limit would be set taking into account information from the Bank of Latvia that the average amount of interest payments per loan is EUR 164 per month, while the average amount of interest payments per borrower is EUR 151 per month.

The Foreign Ministry indicates that said regulatory framework would apply to mortgage loan payments made as of January 1, 2023, i.e. the relevant regulatory framework would apply retroactively and would be favorable to taxpayers.

According to the information provided by the Bank of Latvia, the total number of mortgage loans issued in Latvia is 127,200, while the total number of persons to whom mortgage loans have been issued is 138,600. The fiscal impact of this option is estimated at around EUR 47.6 million in increased tax refunds for one year.

However, the Finance Ministry notes that a taxpayer will only be able to claim eligible expenses if he/she has earned taxable income during the tax year. It is also important that the taxpayer recovers only 20 percent of the amount of the eligible expenses in the form of a refund.

The Altum program, on the other hand, would aim to support borrowers who are unable to make their full interest payments due to the rising EURIBOR interest rate.

The proposed solution would allow credit institutions to capitalize interest on loans that are difficult for the customer to pay at the current EURIBOR interest rate. With Altum's free guarantee, part of the interest would be capitalized and the borrower would make lower monthly payments for up to three years, according to his/her ability to pay and financial circumstances. This program could support around 15,000 such borrowers.

As reported, the Finance Ministry has also drafted amendments to the Corporate Income Tax Law that would oblige banks and consumer credit providers to pay 20 percent corporate income tax on their pre-tax profits, irrespective of whether these profits are distributed or not.

The regulation included in the draft law is expected to apply to credit institutions' profits for 2023. The tax measure is projected to bring up to EUR 140 million into the state budget.

The ministry says it will continue to work with the Bank of Latvia to develop the best solution that focuses on the most socially vulnerable households and does not jeopardize the investment environment and access to financial services in the long term.