One of the biggest challenges in South Africa (aside from all the obvious ones) is encouraging us to save. When interest rates go up, everybody loses their houses and this makes it difficult for the reserve bank to react to inflationary pressures through interest rate hikes.
I apologise for the maths,,,,
So I suggest a simple improvement - allow the interest on a mortgage bond to be tax deductible. But it is only tax deductible if the tax saving is paid into the mortgage bond account to reduce the balance of the mortgage bond (this could be managed seamlessly by the banks).
Now this isn't a solve everything solution - people with large amounts of other debt such as vehicles and credit card debt will still be at risk.
As a test I did a simple exercise. I assumed that someone earning R30 000 per month had a bond of R1 million. At a 10% interest rate that person will be paying approximately R10000 per month as a repayment. Of that 86% is interest which if we make tax deductible would reduce that persons monthly tax from R5805 to R3339 for a difference of R2466 in the first month.
As you pay off more capital however the tax saving reduces quite quickly over time and so over the full 240 months of a bond the average difference in tax would be R954 per month or put another way the effective tax rate would drop from 19% to 16%.
The difference however in repayments is enormous :
Over the life of the R1 million bond, you would pay R1.3 million in interest alone ----> total cost R2.3 million
If this tax incentive were in place you would pay R0.7 million in interest ----> total cost R1.7 million
A net saving of R600 000 - a whopping 42% of interest would be saved.
Furthermore the bond would be paid off after just 13 years instead of 20.
This could even be capped at this level if you want to prevent people with more expensive houses benefiting more.
Of course the question is : Why would government ever do this ?
1) Home ownership is a priority - this makes it easier to own a house at all levels
2) This rewards a long term saving mentality - government is trying to promote this with expensive pension fund schemes
3) The property market will probably improve leading to more transfer duties in the pockets of government
4) A bit more reserve bank flexibility around interest rates
5) The actual tax cost is not that big relative to the enormous interest savings - people will have more disposable income which will improve their ability to pay off OTHER debt sooner too