The National Party’s plan to restore interest deductibility for residential landlords could cost as much as $100 million a year more than it anticipated due to rising mortgage rates.

Until recently, landlords have been able to deduct the interest they pay on their rental properties from their taxable rental income. In 2021, the Government announced it would phase out this tax advantage amid concerns that it was fuelling property speculation.

The changes have long been opposed by National, which says commercial operators in other industries can deduct interest from their taxable income. As part of its $14.6 billion tax package announced in August, the party says it would phase interest deductibility back in over two years if elected.

“Since Labour introduced their additional landlord taxes, average weekly rents have increased by $75 a week. National will restore interest deductibility in a phased way that is responsible and credible,” the party’s finance spokesperson Nicola Willis said at the announcement of the policy.

The party based its costings on the public figures for the interest deductibility changes which were released when Labour first made them in 2021. When fully restored, interest deductibility would cost the government an additional $650 million a year, National estimated.

However, since those public costings were calculated, mortgage rates have risen sharply in response to OCR hikes from the Reserve Bank. The average two-year fixed rate fell to 2.53 percent in June 2021 but is now at 6.88 percent.

Many landlords will now be paying more in interest than previously anticipated. If these payments were tax deductible, the government would lose out on more revenue than previously expected.

A November 2022 briefing to then-Revenue Minister David Parker, obtained by Newsroom under the Official Information Act, provides updated estimates of the savings from the interest deductibility changes in light of the rise in mortgage rates. By the 2025/26 year, the $650 million in additional tax revenue would instead by $760 million.

For National, this indicates restoring interest deductibility would cost a corresponding $110 million a year more.

Labour’s finance spokesperson Grant Robertson said Willis should include the updated figures in National’s upcoming fiscal plan.

“National have already been guilty of failing to cost their policies properly, and they will need to incorporate the most up to date forecasts in their fiscal plan,” he said.

Willis said the party was confident in its calculations and suggested the roughly $100 million annual additional cost might be offset by the withdrawal of landlords from the market.

“National is confident in our figures. They have been independently assessed by Castalia Advisors,” she said.

“Our figures are appropriate. As you identify, multiple factors impact on the cost – particularly residential investment and interest rates. Interest rates are forecast to moderate and by 2026 be broadly in line with that forecast in Budget 2022, when the Government’s costing of the policy was published. Further, residential investment has fallen significantly and is expected to remain weaker than previously predicted, which would reduce the cost of the policy.”

Marc Daalder is a senior political reporter based in Wellington who covers climate change, health, energy and violent extremism. Twitter/Bluesky: @marcdaalder

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