Miras - How Did It Work Back In The Last Crash?

[Benedict]

It comes up from time to time and I don't know what the deal was, and no amount of googling seems to turn it up. Could you claim back all of the interest? I know when it was finally abolished it was only 10% on 30k, but I gather they phased it out gradually.

I vaguely recall an argument between 2 friends at school, one had parents who'd paid off their entire mortgage and was boasting about it, the other argued that there was no point paying off the last 30k if they were a taxpayer because they got tax relief on it so it was effectively free money.

Flimsy anecdotal evidence though, can one of the many well informed people on here who was paying a mortgage at the time they phased out double interest relief just before the last crash clarify the whole situation for me?

If it suddenly went from the first 60k being free to only 30k being free and the next 30k being at the prevailing rates of 12% or so that's a pretty big impact, considering mortgages at the time weren't nearly so large as they are now. If it was only a piddly 10% or so of it then it's not an issue.

All advice greatly appreciated

[Guest tbatst2000]

It comes up from time to time and I don't know what the deal was, and no amount of googling seems to turn it up. Could you claim back all of the interest? I know when it was finally abolished it was only 10% on 30k, but I gather they phased it out gradually.

I vaguely recall an argument between 2 friends at school, one had parents who'd paid off their entire mortgage and was boasting about it, the other argued that there was no point paying off the last 30k if they were a taxpayer because they got tax relief on it so it was effectively free money.

Flimsy anecdotal evidence though, can one of the many well informed people on here who was paying a mortgage at the time they phased out double interest relief just before the last crash clarify the whole situation for me?

If it suddenly went from the first 60k being free to only 30k being free and the next 30k being at the prevailing rates of 12% or so that's a pretty big impact, considering mortgages at the time weren't nearly so large as they are now. If it was only a piddly 10% or so of it then it's not an issue.

All advice greatly appreciated

My recollection of how it worked is:

In the 70s and early 80s, every tax payer got a 30K MIRAS allowance. This meant that any interest paid on a mortgage up to 30K was paid out of pre-tax income rather than post-tax income. This was gradually reduced firstly by pretending the tax rate you paid was lower than it actually was and, later, by restricting the relief to a single person's income. Finally, at some point, it was abolished for all new mortgages. The ending of dual MIRAS has been said to be what precipitated the last crash but I don't believe a word of it.

Incidentally, all mortgage interest payments in the US are tax deductable (subject to the alternative minimum tax).

[Benedict]

My recollection of how it worked is:

In the 70s and early 80s, every tax payer got a 30K MIRAS allowance. This meant that any interest paid on a mortgage up to 30K was paid out of pre-tax income rather than post-tax income. This was gradually reduced firstly by pretending the tax rate you paid was lower than it actually was and, later, by restricting the relief to a single person's income. Finally, at some point, it was abolished for all new mortgages. The ending of dual MIRAS has been said to be what precipitated the last crash but I don't believe a word of it.

Incidentally, all mortgage interest payments in the US are tax deductable (subject to the alternative minimum tax).

Cool, so a 22% / 40% discount on the interest for that amount then . . . not enough to crash a market on its own really, but an extra kick in the teeth if interest payments are on their way up I guess.

EDIT - many thanks for the info

Edited September 27, 2007 by Benedict

[AteMoose]

Debt is traditionally tax deductible, if you run a business you can deduct your debt servicing costs (I/O) against your income, you get less income but you pay less tax. BTL'ers currently do this with there I/O mortgages on there properties, so they have a massive advantage when buying a house to you and me.

MIRAS was the same for homeowners, if you earned a salary, you could reduce the amount of tax you paid by having a mortgage, the government gave you some of your tax back if you had a mortgage

IMHO, this government will eventually plug the plug on BTLers by reducing and abolishing this edge....

Edited September 27, 2007 by moosetea

[Benedict]

BTW - saw in the evening standard last night that Sarkozy is trying to introduce or increase mortgage interest tax relief to stimulate the property market in France. Wonder if Gordon will try something like that if prices do drop properly.

[AteMoose]

BTW - saw in the evening standard last night that Sarkozy is trying to introduce or increase mortgage interest tax relief to stimulate the property market in France. Wonder if Gordon will try something like that if prices do drop properly.

yeah i agree, maybe for new FTBers but to balance the books remove it for new BTLers. The problem is making the change without causing a panic, rush or stall..

MIRAS for a couple was 60k (30k each about the value of a house in 1987), after 1988 30k was available.

http://en.wikipedia.org/wiki/Mortgage_Inte...elief_At_Source

Correct me if i'm wrong, but halving the allowance caused a rise in prices before 88 as people rushed in and a crash after, as the cost to a FTBer (couple) rose significantly (almost doubled if you include the rises caused by the rush and rising interest rates) ...

BOOT NOTE : The boomers really had it all, they got MIRAS to help them buy, high inflation that created a 'housing ladder' that allowed them to trade up and create equity and erode debt, when they had equity by 2000 MIRAS was removed, as they piled into BTL and another boom helped by lower interest rates, and higher immigration....

BOOT NOTE 2 : The removal of dual income MIRAS was really really stupid, but i guess it was done because the tories through houseprices were too high and they needed a soft landing, the plan backfired it produced an extra boom and a massive stall. A little bit of thought, and detailed analysis would have been enough to predict what would happen....

Edited September 27, 2007 by moosetea

[Benedict]

yeah i agree, maybe for new FTBers but to balance the books remove it for new BTLers. The problem is making the change without causing a panic, rush or stall

When has that ever been an issue for politicians? Shove stupid policies through blindly in the face of overwhelming contempt from everyone involved and ******** to the consequences, that's the only way to get ahead in politics.

[Lord Lister]

I vaguely recall an argument between 2 friends at school, one had parents who'd paid off their entire mortgage and was boasting about it, the other argued that there was no point paying off the last 30k if they were a taxpayer because they got tax relief on it so it was effectively free money.

What school did you go to? In my day it was who would win in a fight between Batman and Superman

[iamnumerate]

yeah i agree, maybe for new FTBers but to balance the books remove it for new BTLers. The problem is making the change without causing a panic, rush or stall..

MIRAS for a couple was 60k (30k each about the value of a house in 1987), after 1988 30k was available.

http://en.wikipedia.org/wiki/Mortgage_Inte...elief_At_Source

Correct me if i'm wrong, but halving the allowance caused a rise in prices before 88 as people rushed in and a crash after, as the cost to a FTBer (couple) rose significantly (almost doubled if you include the rises caused by the rush and rising interest rates) ...

Yes that is what caused the last boom and bust. A policy which really killed the tories.

[JustYield]

The real effect of MIRAS was to cause a rush to buy between 1987-88 (I think) so couples qualified for the relief before it was phased out. This further stoked an already hot market and was a classic "unintended consequence".

Someone wiser and older can fill in the details.

[crashmonitor]

I bought my second house in April 1988,four months before the abolition of double rate tax relief for joint mortgages.It would not have effected me because my mortgage was only 23.5K anyway(within the single 30K threshold),on which I got 25% discount as the Standard Rate of Tax was then 25%.

However,in the scramble to beat the deadline houseprices went stupid.By April 89 my house had increased by 50%.then came the 7 year bust.

[Methinkshe]

I bought my second house in April 1988,four months before the abolition of double rate tax relief for joint mortgages.It would not have effected me because my mortgage was only 23.5K anyway(within the single 30K threshold),on which I got 25% discount as the Standard Rate of Tax was then 25%.

However,in the scramble to beat the deadline houseprices went stupid.By April 89 my house had increased by 50%.then came the 7 year bust.

My experience was similar. It is likely that a crash could have been avoided if no warning had been given of ending of MIRAS and it had just been announced on Budget Day as a done deal. As others have said, it was the advance warning that accelerated HPI drawing in loads of buyers who would otherwise have waited. By the time the change was introduced there were no buyers left. The market just stalled and then nose-dived.

[Benedict]

What school did you go to? In my day it was who would win in a fight between Batman and Superman

This was when we were about 16 / 17 I think.

[Benedict]

I bought my second house in April 1988,four months before the abolition of double rate tax relief for joint mortgages.It would not have effected me because my mortgage was only 23.5K anyway(within the single 30K threshold),on which I got 25% discount as the Standard Rate of Tax was then 25%.

However,in the scramble to beat the deadline houseprices went stupid.By April 89 my house had increased by 50%.then came the 7 year bust.

Ouch . . . on that reckoning a sudden 50% spike followed by 7 years of stagnation is still 6% a year average HPI, you just got it all at once

[roadtoruin]

Ouch . . . on that reckoning a sudden 50% spike followed by 7 years of stagnation is still 6% a year average HPI, you just got it all at once

6% HPI LOL, Nice one - if only it was true...

My 1988 experience was: 1988 - 55K bought

1989 - 73K valued (and next door sold at)

1993 - 30K (next door sold at) [London SE18 BTW]

It was back up to the 1988 price in around 2000 - or 0% HPI over 12 years

[stormymonday_2011]

MIRAS was one of the factors stoking HPI in the 1980s. One of the reasons the Tories abolished it was because it distorted the market. In fact their policy worked because it did help bring house prices down to affordable levels. Unfortunately, a lot of people got burnt in the process. Landlords have always enjoyed tax reliefs on loans taken out to fund their business so there is nothing really new in this phenomenon. The main difference was in the past this was really a specialist business without thousands of amateur investors dabbling in the market. I think HMRC have already got their eye on BTL which are really disguised home purchases (ie people buying each other houses and the renting to each other). Of course, unlike ordinary buyers the BTL brigade have to pay tax on the Capital gains on their properties. Many I suspect do not realize that when they come to sell their investment this little time bomb will come to bite them in the a**e. Because of the nature of the asset the state will have no problems in tracking these transactions so the duty is going to be hard to evade. You can be certain that the Treasury will be looking at this area as one way of plugging the hole in the PSBR.

[Methinkshe]

6% HPI LOL, Nice one - if only it was true...

My 1988 experience was: 1988 - 55K bought

1989 - 73K valued (and next door sold at)

1993 - 30K (next door sold at) [London SE18 BTW]

It was back up to the 1988 price in around 2000 - or 0% HPI over 12 years

I bought 1982 for £30,000

Sold 1988 for £160,000 with OPP for Nursing Home

My buyer sold 1989 for £90,000 - he'd overstretched his finances.

[bobthe~]

IIRC the abolition of Joint MIRAS was to close a loophole whereby unmarried couples qualified for double MIRAS and married couples didn't qualify.

I don't think it had anything to do with trying to cool HPI in itself, although I would imagine it was recognised as being iniquitous.

As was mentioned, it was anounced in the March budget but delayed until June, apparently to allow pipeline cases through, but in practice it allowed the final huzzah of the market.

[basildonian]

IIRC the abolition of Joint MIRAS was to close a loophole whereby unmarried couples qualified for double MIRAS and married couples didn't qualify.

I don't think it had anything to do with trying to cool HPI in itself, although I would imagine it was recognised as being iniquitous.

As was mentioned, it was anounced in the March budget but delayed until June, apparently to allow pipeline cases through, but in practice it allowed the final huzzah of the market.

I remember it well. It definitely caused a major crash in the area I was living at the time (Oxfordshire) At that time I was in the RAF and many people were rushing out to buy houses with friends that where barely more than acquaintances, just so they didn't 'miss the boat'.

As you say the biggest mistake was announcing the end of dual MIRAS in the spring budget but not implementing it until the summer. This gave people just enough time to rush out and buy before the deadline. Any couple that was even thinking about buying a house immediately brought their plans forward. As I said single people did the same thing by getting together with other singles who were thinking of buying so they didn't miss out.

I know several people that were severely burned by this. Very young people, some even in their teens bought with 2 or more 'friends' because it was seen as a better financial option than renting. At the time the old 3+1 salary multiplier applied for mortgages but towards the end some mortgage companies began offering 3 x joint income.

Fast forward a couple of months and suddenly there were no more FTB's. Not long after interest rates began to rise and many of these people were in negative equity. Young friends often start to drift in separate directions and suddenly they found themselves wanting to get out of a mortgage for a house that they no longer wanted to live in, could no longer afford, and could not afford to sell because they would still end up owing tens of thousands on their mortgage. I know several people that took 10+ years to recover.

With hindsight, had the MIRAS been immediately removed (except for mortgage applications that were already in progress etc.) we would not have had this problem. Instead we had the trigger that (IMO) definitely started the crash. I would add that people often talk about this crash as a 'slow drawn out affair' etc. This was certainly not the case were I was living. Within weeks of the MIRAS deadline prices had fallen around 30%

Baz

Edited September 27, 2007 by basildonian

[South Lorne]

IIRC the abolition of Joint MIRAS was to close a loophole whereby unmarried couples qualified for double MIRAS and married couples didn't qualify.

I don't think it had anything to do with trying to cool HPI in itself, although I would imagine it was recognised as being iniquitous.

As was mentioned, it was anounced in the March budget but delayed until June, apparently to allow pipeline cases through, but in practice it allowed the final huzzah of the market.

...agreed remember it well .....announced in March and delayed until 31st August 1988.....we exchanged contracts to purchase new build in March, rented until July after selling our own and in the three months the value increased 55%.....bad spike created by the Chancellor.....

[Imp]

MIRAS is one of the key reasons why it is different this time. Everyone talks about 15% mortgages during the last crash (which were only for a few months). Now bring in MIRAS on 25% tax and this equates to 11.25% interest rates. For a high income earner on 40% tax, the equivalent interest rate is 9%. Suddenly the interest rates we have today don't seem so low.

[ARIMA]

I remember it well. It definitely caused a major crash in the area I was living at the time (Oxfordshire) At that time I was in the RAF and many people were rushing out to buy houses with friends that where barely more than acquaintances, just so they didn't 'miss the boat'.

As you say the biggest mistake was announcing the end of dual MIRAS in the spring budget but not implementing it until the summer. This gave people just enough time to rush out and buy before the deadline. Any couple that was even thinking about buying a house immediately brought their plans forward. As I said single people did the same thing by getting together with other singles who were thinking of buying so they didn't miss out.

I know several people that were severely burned by this. Very young people, some even in their teens bought with 2 or more 'friends' because it was seen as a better financial option than renting. At the time the old 3+1 salary multiplier applied for mortgages but towards the end some mortgage companies began offering 3 x joint income.

Fast forward a couple of months and suddenly there were no more FTB's. Not long after interest rates began to rise and many of these people were in negative equity. Young friends often start to drift in separate directions and suddenly they found themselves wanting to get out of a mortgage for a house that they no longer wanted to live in, could no longer afford, and could not afford to sell because they would still end up owing tens of thousands on their mortgage. I know several people that took 10+ years to recover.

With hindsight, had the MIRAS been immediately removed (except for mortgage applications that were already in progress etc.) we would not have had this problem. Instead we had the trigger that (IMO) definitely started the crash. I would add that people often talk about this crash as a 'slow drawn out affair' etc. This was certainly not the case were I was living. Within weeks of the MIRAS deadline prices had fallen around 30%

Baz

Interesting. The only equivalent trigger I can think of would be dropping the tax exemption for BTL mortgage interest payments. Now how likely is that...? Maybe something for the Priced-Out protesting types to think about.

[Thread Killer]

What school did you go to? In my day it was who would win in a fight between Batman and Superman

They did in fact fight, and it was Batman who won. Here's the proof, along with a vigorous discussion:

http://uk.answers.yahoo.com/question/index...21115317AAFctGa

Edited September 27, 2007 by neil9327

[Wlad]

The last 30k if they were a taxpayer because they got tax relief on it so it was effectively free money.

Hmmm... one of the dads wasn't too sharp on maths. You'd get a tax deduction on the payments, but you'd still be paying a net 75% of the interest costs, which would mean a net cost of > 0. So not free money in the slightest.

[South Lorne]

Interesting. The only equivalent trigger I can think of would be dropping the tax exemption for BTL mortgage interest payments. Now how likely is that...? Maybe something for the Priced-Out protesting types to think about.

....the set-off permitted of IP on the mortgage + other expenses against IR from rent should be cancelled immediately ...it is creating a false boom when people need houses....the problem is there are too many VI's in Parliament....the way round that is any MP with a BTL should declare and not vote on the issue ........same should apply to the House of Lords in case it is referred .......then we may claim to have taken a step towards democracy which many of these fools declare we have attained, already ...