AN International Monetary Fund (IMF) report has advised Switzerland to reconsider the tax incentives for taking on large mortgages as they induce households to take on mortgage debt.

According to the IMF Country Report captioned ‘Technical Note - Macroprudential Institutional Arrangements and Policies, "There is no dispute that the current tax regime gives strong incentives for households to take on more mortgage debt than they otherwise would, and also to use pension Pillar 2 and 3a assets for down payments. This is not a direct explanation for the recent mortgage growth, as this regime has been in place for a long time, but it still contributes to high levels of mortgage debt. Although it would politically very hard to do, and has been tried, reform should be part of the agenda."

The Note has been prepared by IMF staff under IMF's Financial Sector Assessment Program.

The Note says: "The IMF has consistently advised to reform the system, by phasing out the existing tax incentives, while at the same time phasing out taxation of imputed rents, designed to be revenue neutral if needed. Removing tax incentives in favor of mortgage debt are furthermore consistent with the findings of the board paper on Key Aspects of Macroprudential Policy."

Pointing out that the d evelopments in real estate and mortgage lending are important systemic concerns, the Note observes: " Very loose monetary policy has driven interest rates down to historically low levels, accelerating mortgage lending and bringing total mortgage debt to more than 140 percent of GDP."

It continues: "In parallel, housing prices have been rising, particularly in certain segments of the market. Tax policies have contributed to the real estate boom, since the imputed rental value is fully taxable, while mortgage interest and other costs are tax-deductible."

The Note explains: "For residential property in Switzerland the imputed rental value (i.e., the equivalent rental value of owner-occupied property) is fully taxable, while at the same time value-preserving maintenance costs, certain operating costs, value enhancing energy measures and paid mortgage interest are tax-deductible. As a result the tax system, through the deductibility of mortgage interest, incentivizes households to take out mortgages."