Return of mortgage interest upon early repayment

A conscientious borrower has the right to a refund of mortgage interest upon early repayment, but unfortunately the practice is ambiguous and not many people know about this possibility; as a result, they lose quite a lot of money, which goes to the bank account.

The annuity system of banks is used in almost all cases of mortgage lending; it is based on the fact that monthly payments are evenly distributed over the duration of the agreement, while the amount of the repaid loan increases, and the interest on it should decrease. Based on this, it follows that first the borrower pays interest, and then the borrowed amount.

Receiving a mortgage interest deduction

When purchasing residential real estate using mortgage money, the legislation of the Russian Federation offers the return of 2 tax deductions:

1. Main deduction.
2. Mortgage interest deduction.

The bottom line is that after purchasing and signing property documents, you have the right to return part of the money spent.

In case of official employment with a “white” salary, the accounting department transfers income tax (13%) to the budget. The employee receives a salary with the deduction of personal income tax - personal income tax. If you purchase a home, this money can be returned.

Attention!

If a citizen does not pay personal income tax or works as an individual entrepreneur under the simplified tax system, he has nothing to return from the budget. Only actual accrued or paid tax can be refunded.

The following categories of citizens who remit personal income tax can apply for a tax refund:

1. Employees of enterprises and individual entrepreneurs with the main tax system.
2. Pensioners who retired before 3 years.

The loan consists of two parts: the principal debt and the interest accrued on it. Accordingly, the tax deduction when purchasing real estate with a mortgage is calculated based on the size of each of these parts.

What is the main mortgage tax deduction?

The main deduction includes personal and credit funds spent on the purchase of any residential property.

The procedure for receiving a deduction when purchasing a home with a mortgage is the same as when paying with your own savings.

What is the mortgage interest deduction?

The amount of tax deduction for repaid interest on a home loan depends on the interest actually paid. The refund amount will be equal to the amount of the transferred interest multiplied by 13%.

Important!

If the value of the property specified in the contract is less than the amount of mortgage funds, then the deduction will be calculated based on the value of the home.

Writing an application

Compilation rules

To begin the process, an application (written claim) is submitted, executed in a semi-free form, in written or printed form. It would also be correct to attach a copy of the agreement and a certificate of closure of the loan account to the document.

What points are contained?

In an application for a tax refund for mortgage interest that is overpaid, as a rule, the following items are filled in:

• Name of the bank.
• Borrower details: full name, passport details.
• Loan agreement number, date of signing.
• The total amount of the loan, term, rate and other parameters (taken from the agreement).
• Date of final settlement with the bank on the loan.
• The amount of overpaid interest and its calculation.
• Account or card number where you want to make a refund.

Where to submit?

The claim is sent to the bank branch where the agreement was concluded . The validity period of the application is 3 years, during which time, according to the law, the borrower must return his money. It is worth sending it either by registered mail or handing it over to a bank employee against signature; this will certify that the borrower has submitted the claim to the bank.

When does the right to a tax deduction on a mortgage loan arise?

Both types of deductions are returned no earlier than the year following the year of registration of ownership of the property.

In most cases, the mortgage agreement is concluded before receiving housing documentation. This point is not related to the amount of the mortgage interest refund - the deduction includes the entire amount of interest you paid from the very first payment.

Attention!

If the total amount of your salary for the year and the amount of taxes transferred allow, you can apply for a one-time deduction.

You can return the tax on mortgage interest only in accordance with your actual payments to the bank - for the past year.

Is this possible?

Answer: possible. If payments are annuity (i.e.) and are made by the borrower once a month in the same amount.

According to Art. 810 of the Civil Code of the Russian Federation, a citizen has the right to repay the loan ahead of schedule (not in 15, but in 5 years, for example).

In this regard, a dilemma arises: the borrower did not use the bank’s money for the expected period, therefore, he can return his money, with which he paid off the interest to the bank ahead of schedule. After all, he repaid the entire amount that, according to the agreement, he was supposed to pay gradually over a certain period of time.

The shorter the period, the less the overpayment to the bank at the established interest rate. It is no secret that most of the time the borrower pays interest to the bank , and not the principal amount of the debt.

A document such as Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation dated September 13, 2011 No. 147 (“Review of judicial practice in resolving disputes related to the application of the provisions of the Civil Code of the Russian Federation on a loan agreement” protects the rights of an ordinary citizen who has applied to a bank for a loan to return overpayments to him facilities.

How long does it take to receive it?

The right to return the transferred money arises in the calendar year in which the ownership of it is dated and extends to subsequent years.

Important!

People who have retired are allowed to transfer the deduction 3 years before the emergence of ownership rights.

If the purchase of an apartment occurred in the past, and the deduction for it was not issued, then you can return it now - there are no restrictions on the return period. However, you can return personal income tax for a maximum of the last 3 years.

For example, if an apartment was purchased in 2021, and the deduction is issued in 2021, then the tax will be refunded for 2021, 2021 and 2021.

Nuances of interest reimbursement

Russian tax legislation strictly regulates the process of processing compensation for a mortgage. The Tax Code of the Russian Federation (clause 4 of Article 220) establishes a maximum limit on the amount of deduction for transactions worth up to 3 million rubles (if the housing costs more, the 13 percent refund rate is calculated based on the maximum value). Thus, according to the law, each taxpayer has the right to receive compensation of up to 390 thousand rubles for a mortgage in total for all years. However, in practice, it is not always possible to fully reimburse the amount, since returning 13% from the mortgage is possible only under the condition of a long lending period and a high salary.

If wages are low, modest amounts are paid into the budget each year, which means the compensation will be small. The greater the confirmed income and contribution to the budget, the greater the chance of reimbursing the maximum amount.

If the loan agreement was signed before 01.01. 2014, then the upper threshold of 390 thousand rubles is removed - you can compensate the entire amount within thirteen percent of contributions to the budget for the year.

No deduction available

There are situations in which you cannot use a property tax refund:

1. The property was purchased from related parties. The deduction is not provided if housing was purchased from relatives or an employer. These categories of people are stakeholders.
2. The person received the available deduction limit. You can return the money 1 time if the apartment was purchased before 2014. After 2014, adjustments were made; if the amount of the deduction received is less than the maximum limit, then the remaining funds can be received by purchasing another property.

Annuity type of payments - what is it?

An annuity payment is a form of payment in which the financial company collects the debt, over the entire term of the mortgage agreement, in equal installments. A repayment schedule with annuity payment is always attached to the contract. In it, the client sees what part of the deposited amount goes towards repaying the debt and interest. If the client makes a payment in a large payment, for example, 7,300, instead of 7,289 rubles, then the difference, in this case in the amount of 11 rubles, simply remains in a separate account and is debited on the date of the next payment. Of course, if the difference is not significant, then it’s okay. When it is possible to pay 2-3 times the amount, it is worth writing an application for partial early repayment. If this is not done, the required amount will simply be debited from the account every month.

Rules for obtaining mortgage interest deductions

Significant changes occurred on January 1, 2014:

1. until 01/01/2014 There is no limit on the amount of interest deduction.
2. estate after 01/01/2014 The maximum amount for tax deduction on mortgage interest is RUB 3 million. That is, if the interest rate on the mortgage exceeded this amount, you can return 13% only with 3 million rubles.

Conditions for refund of property tax on mortgage interest:

1. Purpose of the loan. An agreement concluded between a person and a company providing a loan must contain a line with information that resources are issued for the purchase or construction of a specific home.
2. Refund of interest actually paid. It is allowed to indicate in the declaration only interest on mortgages repaid in previous periods.
3. Receipt of money in the year following the year in which title to the property is acquired. If an apartment was purchased in 2021, the right to it was received in 2021, then you should apply for the deduction no earlier than 2021.
4. Receiving a deduction from mortgage interest paid before registration of the property title. Interest paid before the title date is not included in the tax refund calculation.
5. Single document 3-NDFL for principal and interest deductions on mortgages. When applying for both deductions at once, you do not need to fill out two declarations - the information is provided in a common form. If a deduction on the principal debt has already been received, the amount must also be written down in the document as a separate item.

Cases for appeals

Refunds involve several cases:

• The client decided to make an early repayment
  . In such situations, the financial company must recalculate the interest on the remaining amount, thereby creating a new schedule for making payments.
• Another option is if the mortgage loan is repaid in full
  .

To cope with the problem, you need to request a certificate from the financial company that the mortgage has been repaid in full, as well as recalculate the percentage for the period of use in fact and for the period in which the borrower did not use the financial company’s funds.

Receipt procedure

There are two ways to get your property tax refunded:

1. Through the employer this year. Income tax is not returned separately, but is included in subsequent salary payments.
2. Through the Federal Tax Service next year or later. 13% of the property tax is returned to the person in the total amount for a year or several years.

Through the employer

The interest deduction can be partially transferred to your account every month: the Federal Tax Service stops withholding personal income tax, and the salary increases by this amount.

To receive a refund from the employer and avoid remitting income tax in the current year, you must request a notification from the Federal Tax Service Inspectorate confirming the possibility of receiving a deduction.

Applying for a mortgage interest deduction through your employer is not entirely convenient. Periodically, you need to request confirmation from the lender and again take a notification from the tax office.

Attention!

If you apply for a refund at the end of the year - for example, in September, the Federal Tax Service will refund the tax from the beginning of the year. 3-NDFL is not submitted when returning through the employer; an application is sufficient, which is considered within 30 days.

Through the Federal Tax Service

The tax refund procedure includes: collection and submission of documentation, inspection by the Federal Tax Service and transfer of funds. Each specific case has its own characteristics, and therefore it is advisable to clarify the exact requirements for filing a deduction.

Attention!

Copies of documents intended for submission to the tax service must be notarized.

You can submit documents in one of the following ways:

1. Personally. If, when checking the certificates, the inspector reveals inconsistencies or shortages of any of the documents, you will know about it immediately on the spot.
2. By post. Referring to paragraph 4 of Art. 80 of the Tax Code of the Russian Federation, documentation must be sent by valuable correspondence with an inventory of investments. The prepared documents are placed in an envelope (without sealing) and a postal inventory is drawn up in two copies. It lists all sent documents. The Federal Tax Service has 3 months to check the received documents, and another 1 month is provided for transferring the tax amount.

Important!

If the Federal Tax Service discovers an incomplete package of documents or errors in filling out, you will find out about this only after 2-3 months, when the desk audit is completed.

We return the property deduction through the employer

If you are not ready to wait 4 months for a refund, then it is possible to receive mortgage compensation through your employer. In this case, you need to collect a similar package of documents (only you no longer need to fill out the 3-NDFL declaration) and write an application according to which the tax office is obliged to issue you a notice to the employer a month after submitting the documents.

Having received the notification, be sure to write a deduction application, then both of these documents should be promptly submitted to the accounting department. From this moment on, all necessary calculations for calculating deductions will be made by the employer. Starting from the month of submitting documents, you will receive a salary without a 13% deduction; this will continue until the end of the calendar year or until the deduction amount is exhausted, depending on which event comes first.

By returning the mortgage deduction in this way, you will begin to receive payments much faster, but monthly financial receipts will be several times less than the total amount that you would receive after 4 months by contacting the tax office.

As you can see, getting reimbursement for interest on a mortgage is not particularly difficult - you can collect a package of documents quite quickly, and if you have difficulties filling out the 3-NDFL declaration, you can always contact a specialist.

Documentation

To apply for a tax deduction for real estate purchased on credit, certain documents must be submitted to the tax office in accordance with your place of residence:

1. Agreement with the company that issued the loan. It can be a banking institution or an employer company.
2. Original certificate of interest paid for the year. The document is issued in the place where the loan was received.
3. Identity document. It is allowed to present a passport or other equivalent document. A copy of the first page and registration will be required.
4. Original certificate 2-NDFL. Issued by the employer's accounting department. If a person worked at different enterprises during the year, you need to request certificates from all places of work.
5. The original application for a deduction in the established form. The document specifies the details for transferring funds from the budget.
6. A certified copy of the share participation or purchase and sale agreement.
7. Copies of documents confirming payment for the transaction.
8. A copy of the transfer and acceptance certificate, if the property was purchased under an equity participation agreement.
9. A copy of an extract from the Unified State Register of Real Estate, if the property was purchased under a sales contract.
10. Original tax return 3-NDFL.

Some tax offices require proof of payment of principal and mortgage interest. You are not required to provide these certificates.

Attention!

In this case, act as you wish - prepare the required documentation or refer to the letter of the Federal Tax Service of the Russian Federation dated November 22, 2012. It states that to receive a property tax refund, a bank certificate is sufficient.

Where to apply for compensation

So, you are ready to file a tax deduction; all that remains is to decide where and what documents need to be submitted. There are three options for the development of events:

1. It is necessary to visit the tax authorities at the place of registration and submit all the necessary documents. Please note that they always have a lot of work to do, the inspector will consider your application for at least 3 months, if the decision is positive, the money will be transferred within a month.
2. In the same way, you can submit papers to the MFC.

You can also submit a tax deduction application to your employer.

Obtaining a tax deduction when refinancing a loan

Refinancing a loan agreement with a third-party banking institution gives you the right to receive a deduction on interest on both the original and the existing loan.

To request a deduction for the interest on a loan received to refinance a mortgage transaction, the package of documents is supplemented with a copy of the current loan agreement.

Attention!

You can refinance a loan unlimitedly; this does not affect the right to return personal income tax on mortgage interest.

However, there are two limitations:

• the new agreement must contain information that it was concluded to refinance the previous mortgage loan;
• the loan must be refinanced in a bank licensed by the Central Bank.

The process of processing a personal income tax refund from mortgage interest through the Federal Tax Service:

1. Registration of a personal account on the website nalog.ru. The service makes filling out easier since all limits, periods and balances are entered automatically.
2. Preparation of documents. To receive a tax refund on interest, a certificate from the lender is required. The form from the online application will do.
3. Filling out a declaration in your personal account.
4. Attachment of documents - scans or photographs.
5. Attachment of an application for a deduction with the obligatory indication of details for the transfer of funds.
6. Waiting for the completion of the inspection by the Federal Tax Service.

When can a borrower return the money overpaid for the mortgage payment?

More than half of conscientious borrowers pay off their mortgage debt before the end of the contract, while specifically specifying a long term when applying for a loan. There are two options that are the basis for recalculating the payment amount by the bank in which you can count on a refund of interest paid:

• Partial early repayment. That is, the borrower regularly or several times knowingly pays money that exceeds the required monthly mortgage payment. In these cases, the bank, in order not to miss out on its benefits and so that you do not claim a refund of overpaid interest when repaying your mortgage early, offers to either shorten the term of the contract or reduce the amount of the monthly payment. In this case, the borrower also does not lose, since the bank recalculates the amount with the deduction of what has already been paid;
• Full early repayment. This means that at the time the loan agreement is valid, the borrower pays off the entire amount of debt with a lump sum payment. The annuity payment system of all banks at this moment generates an overpayment of interest, since it was based on a longer period and it is precisely this difference that borrowers can return.

Recommended article: Responsibility, rights and obligations of a co-borrower under a mortgage
It is the second case that serves as the legal basis for the situation in which you can safely contact the bank and demand compensation for the difference in the overpayment, but only for the period of time when full payment has already been made and the agreement was not in force .

The legal grounds providing for the borrower's rights to interest reimbursement are regulated by the regulatory legal acts of the Russian Federation and the explanatory regulations of the Central Bank of the Russian Federation.

What is the relationship between the return on the purchase of a home and the interest on the mortgage?

Until 2014, it was possible to return tax on interest only on housing for which the principal debt was returned. If the principal repayment was not issued for the borrowed property, then interest payments were also denied.

Since 2014, property tax refunds for the purchase of housing and the amount of interest repaid are issued in two separate deductions. Now they can be consistent across different objects.

But subject to the following conditions:

• the right to receive a refund from interest arose after the expiration of 2014;
• the right exists, but was not declared later.

If the right to a refund arose before 2014, then when applying for a deduction in 2021, it is also associated with the main one.

A person independently determines the order in which deductions are processed. Most often, the first to apply is for the main refund issued upon purchasing the apartment, and then for the mortgage interest.

Attention!

If a consumer loan is concluded and a private house is built for its amount, it will not be possible to receive a deduction for mortgage interest due to the lack of a designated purpose specified in the agreement.

Judicial practice in cases of return of mortgage interest in case of early repayment

As a rule, during litigation, banks lose a lot of money on legal costs, and therefore it is extremely unprofitable for them to bring the case to a court hearing and participate there as a defendant, and they try to resolve the issue without allowing the case to go to court. If suddenly such a situation does arise, then the court does not always take the side of the bona fide mortgage borrower. Practice consists of contradictory precedents. The court may also side with the bank. This is justified by the fact that the bank charged interest only for the actual use of the loan on the outstanding balance. Each time the early repayment amount was paid, the bank issued the borrower a new payment schedule with recalculation.

In some situations, the plaintiff in the case adds moral compensation to his claims against the bank, which the court usually grants in a partial amount if it was justified and has a documentary evidence base.

Important: In any case, having decided to make a claim, and especially a claim against the bank, you need to realistically assess your chances and whether it is worth it. Do not forget about the consequences of “bad luck” with financial institutions, because it is unlikely that in the future anyone will want to lend to such a borrower.

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Author:

Maria Yurievna Sokhan

Date of publicationDecember 14, 2018February 25, 2019

How to apply?

Documentation for deduction is submitted in person through the Federal Tax Service or using the Sberbank service.

The application is convenient if a person does not want to learn all the intricacies and fill out the forms themselves.

Attention!

The service for filling out 3-NDFL and preparing documents is 1,499 rubles.

First, an online application is submitted, after which a tax consultant calls and informs about the necessary documents. You can use a scanner or smartphone camera to send images of certificates to the consultant. After receiving the documents, the consultant independently fills out the declaration and sends you the complete package, which you only have to submit to the Federal Tax Service. To use the service, you do not have to be a client of Sberbank.

How to calculate your tax refund

To calculate what the budget reimbursement will be, you don’t need any special mathematical knowledge. The calculation is based on 2 main restrictions:

1. For the year they return an amount of 13% of the tax declared to the Federal Tax Service.
2. The total amount of compensation does not exceed 13% of the cost of housing or 3 million rubles, i.e. no more than 390 thousand rubles.

When filing a return from year to year, the amount of interest will decrease as the debt is paid off, and with it, the amount of deduction available to the borrower will also decrease.

How to calculate deductions and tax due on refund?

The refund reduces the tax base—the amount on which tax is withheld. The deduction amount can be up to 13% of the interest actually paid. For example, if you paid interest on a mortgage of 10 thousand rubles to the bank, the deduction will be 1,300 rubles.

At the same time, they will not be able to pay you more than the amount that was transferred in taxes. For example, you transferred 10 thousand rubles for 2021. – mortgage interest. 13% of this amount - 1,300 rubles. You will receive 1,300 rubles. in case the employer transferred (withheld from the salary) for 2021 1,300 rubles. Personal income tax. If in 2021 the budget received only 1,000 rubles from your salary. income tax, you will also receive 1,000 rubles back based on the results of 2021. 300 rub. will be carried over to next year.

Attention!

The mortgage interest deduction can be carried forward to subsequent years.

Differentiated or annuity payments?

There's one more catch. Banks issue loans on different conditions. And depending on these conditions, the borrower is assigned monthly payments: annuity or differentiated. These are fundamentally different types of interest accrual, and accordingly, early repayment of each of them entails different benefits. To make the picture complete, let’s determine the materiel.

Annuity

– such payments in which the entire loan amount is added to the amount of interest, and the resulting value is evenly distributed over the entire loan period. This will be your monthly annuity payment.

Differentiated

(as is clear from the name) – payments that change over time. That is, the interest on the loan after each payment is recalculated based on how much you now owe the bank. Hypothetically. Overpayments for these types of loans are less, so this banking product is not widely used by financial institutions.

We will not bore you with lengthy calculations of hypothetical amounts with invented interest rates and imaginary volumes of early repayment - there is a lot of this stuff on the Internet. We immediately summarize what our colleagues were arriving at through pages of calculations: it is more profitable to repay an annuity payment ahead of schedule than a differentiated one.

Maximum amount

The legislation of the Russian Federation provides for maximum limits on property deductions:

• to calculate the main deduction - 2 million rubles;
• to calculate the interest deduction - 3 million rubles.

This means that up to 260 thousand rubles. It is allowed to request up to 390 thousand rubles from your transfers in case of purchasing housing. - for repaid interest. That is, you can become the owner of an apartment for 5 or even 10 million rubles, but the Federal Tax Service will pay only 13% of 2 million rubles.

Attention!

The maximum deduction limit for real estate purchased before 2008 is RUB 1 million.

The total amount of the allowed deduction for housing and mortgage interest is RUB 650,000.

If the tax base is small, you can return the tax over several years until the amount is fully compensated.

Calculation

If the payment is an annuity, then the monthly payments have a constant calculation figure. First, the interest to the bank is repaid, and then the amount of the debt. Differentiated payment differs in that in different parts of the term the amount of the loan payment is also different.

The amount of overpaid interest on a loan can be calculated using an online loan calculator. To calculate the amount of overpayment, you must first find the first unknown - the annuity coefficient, on which further calculations will be based.

Formulas and example

You can calculate the annuity coefficient using the following formula::

A = P×(1+P)s / ((1+P)s-1) , where

• P – interest rate coefficient;
• C – loan payment period (calculated in months).

Having calculated the annuity coefficient, you can calculate the monthly payment using the formula:

E = A×P , where

• A – annuity coefficient;
• R – loan amount.

Having received the necessary data, you can calculate the total cost of the loan using the formula:

S = C×E , where

• C – term of loan repayments;
• – monthly loan payment.

Then you can safely calculate the amount of overpayment using a simple formula:

RE = S – P , where

• S – the sum of all loan payments;
• R – loan amount.

For example, a person took out a mortgage loan in the amount of 2 million 800 thousand for a period of 10 years at an interest rate of 12.9% per annum.

P = 0.01

A = 0.01 * (1+0.01)120 / (1+0.01)120 – 1 = 0.01*3.3 / 3.3 – 1= 0.033 / 2.3 = 0.01 E = 0.01*2800000 = 28,000 rub.

S = 120*28000 = 3,360,000 rub.

RE = 3,360,000 – 2,800,000 = 560,000 rub.