Tax credit on home loan interest

If you have a home loan and pay interest on it, you are normally entitled to partial or full deductions. However, the rules on deductibility are different depending on how the dwelling is used.

Deductions on an owner-occupied home loan or a major improvement of such home

Your interest payments entitle you to partial deductions if you have borrowed money to buy a permanent home, or to pay for a major improvement. It does not matter whether the home is a single-family house or an apartment in a housing company.

Deductible part of home-loan interest payments

Year of interest payments Deductible
 2014  75 %
 2015  65 %
 2016  55 %
 2017  45 %
 2018  35 %

The deductible part of the interest payments is primarily subtracted from your capital income. However, if you have no such income or if your interest expense is higher than the capital income you receive, you are treated as having a "deficit of capital income". Then a 30-percent portion of the deficit is credited. It is subtracted directly from the taxes you'd have to pay on your earned income.

For examples of credit calculations, see Tax credit for deficit in capital income below.

Interest deduction for loans taken for investment purposes

If you borrow money to finance your purchase of investment property, and your investment will yield taxable income, interest payments are fully deductible.  Such a loan is viewed as a loan for the purpose of producing income, as in renting out a house or apartment.

Interest payments are primarily subtracted from rental income, and from any other similar income in the hands of the investor that falls into the capital-income category. However, if there is not enough capital income and the result turns out to be negative, 30% of the deficit is credited against earned-income taxes. Credit is also offered for any additional bank charges i.e. not only for the interest.

Interest deduction for other types of home loans

Borrowing money for a summer house

The interest payments are not subject to tax credits or deductions. The tax treatment of such a loan is the same as for consumer borrowing, i.e. it is deemed as "other loan".

Borrowing money for a residence where a child or a grandparent starts living

If a child whose age is 18 or higher or a grandparent lives in a home you have bought — or financed a major improvement of — with a loan and you let them live there rent-free or on below-market rent, you cannot get deductions. The tax treatment of such a loan is the same as for consumer borrowing, i.e. "other loan".

Part-time rental property with part-time own use

A typical part-time arrangement involves a summer home used by the family during a certain season only, and rented out to tenants for the remainder of the year.  If money has been borrowed, the tax authority will split the purpose of the loan and grant the tax credit accordingly. The period when tenants use the summer home paying rent for it qualifies the loan and its interest payments as production of income, but no deductions or credits are available for the period when it is used by the family.

Ownership of a fraction

You may have purchased only a part of a dwelling, and the remainder is financed by a loan taken by the housing company or by other means.  It is worth noting that these arrangements will only give you a tax credit for the interest payments that directly concern your own bank loan.  In other words, when the money that the housing company collects every month from the shareholders is partly intended to cover the interest payments of a loan taken by the company, the shareholders cannot get tax credits or deductions for it.

Partly owner-occupied homes

This is an arrangement involving the purchase of a fraction of the shares.  If the buyer borrowed money to finance the purchase, interest payments are deductible.  However, no credit is given for the interest expenses that the monthly rent payments may contain.

Right of occupancy

The form of residence known as right-of-occupancy (called 'asumisoikeus' in Finnish; 'bostadsrätt' in Swedish) involves an initial payment to receive the right to live in the apartment, and further regular maintenance charges payable to the association.  If the buyer borrowed money to finance the initial payment, interest payments are deductible.

Home improvement

You can get an interest deduction if you borrow money for financing an improvement on your permanent home. This is a similar process as the deduction for home-loan interest payments. For 2017, the deductible part of interest payments equals 45% (35 % year 2018).

However, if you live in a housing company and the loan was taken by the housing company and not by you, the interest payments on the loan are contained in your monthly maintenance charge and are not deductible. Conversely, if you – not the housing company – are the loan client and the bank
lends you money for financing your part of the home improvement expenses or your part of the housing-company loan, the interest payments are deductible. But if the improvement has the characteristics of annual repair work, and the housing company has taken a loan for it, interest payments are not deductible. Examples of annual repair work include indoor painting, wallpapering, replacement of kitchen appliances and fittings — assuming that the overall technical standard of the kitchen remains the same as before.

Government-subsidized loan (Arava)

If a loan was taken within the Arava system, interest payments are not deductible.

Tax credit calculation

The deduction is primarily made from capital income, such as rental income and for example, dividends.  If you have no such income, there will be a credit from your earned-income taxes amounting to 30% of the qualifying interest payments. By 'earned income' we mean wages, salary, pensions, and Kela-paid social benefits.

Tax credit for deficit in capital income

If you don't have any capital income, the credit is given against earned-income taxation — against the tax on your wages or salary — in the form of a "tax credit for a deficit in capital income" (alijäämähyvitys; underskottsgottgörelse).  The highest permissible credit is €1,400 per year.  For couples, it is €2,800 per year.  It is raised by a further €400.00 if you have a child under 18 years, and by €800.00 if you have two or more children under 18 years.

Example: Spouses with two children paid €2,000 in home-loan interest in the course of the year 2017. The deductible part of this expense is €900 (= €2,000 × 45%). They have no capital income, so it is the tax on their wages or salary that is being relieved. They are given 30% credit based on the €900 — or 270 euros (= €900 × 30%). 

Example: Spouses with two children may be given credit for their deficit in capital income, reducing their taxes on earned income, the maximum amount being €3,600 per year (2017). This requires that neither one of the two spouses has any capital income and that their home-loan interest expense reaches €27,000 (because 45% of €27,000 is €12,150; and 30% of that equals €3,645,00).

Increased credit for first-time homebuyers

If you take a loan as a first-time homebuyer, you may deduct an extra 2 percentage points, which gives you a 32-percent tax credit. This benefit is in force for the first year when you move in, and nine years after that.

More information on the rules that define a first-time homebuyer for tax purposes.

Let the Tax Administration know your interest expenses

Interest payments on a home loan can be included in the calculation of the withholding rate marked on your tax card.

Read more about getting a revised tax card

Payments shown on your pre-completed tax return

Your bank gives the Tax Administration information on your loan and its interest payments, so you can see it pre-printed by computer on your pre-completed tax return form.

Check the amounts and the purpose of the loan. If the loan purpose is other than home loan, use the Additional Information space to explain that you have taken the loan to buy a home.  Include the bank's code number of the loan.

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