Home Loan Interest Deduction: How to Claim Mortgage Interest for Maximum Benefit

For the 2024/25 tax year, Hong Kong homeowners face a narrow window to restructure mortgage arrangements before the Inland Revenue Department (IRD) finalises its assessment cycle. With the Hong Kong Monetary Authority (HKMA) reporting in its December 2024 Residential Mortgage Survey that the average mortgage rate rose to 4.125%—the highest since 2007—the cap on home loan interest deduction (HKD 100,000 per year of assessment under Section 26E of the Inland Revenue Ordinance, Cap. 112) now covers a shrinking proportion of actual interest costs. For a typical HKD 6 million mortgage at 4.125%, annual interest exceeds HKD 240,000, leaving HKD 140,000 of non-deductible expense. The 2025/26 Budget, delivered on 26 February 2025, did not raise the cap, making strategic timing and joint ownership elections critical for maximising the remaining benefit. This article explains how to claim the deduction correctly—and legally—under current law.

The Statutory Framework: Section 26E and Its Limits

Eligibility Criteria: Who Qualifies and for What Property

The home loan interest deduction is governed by Section 26E of the Inland Revenue Ordinance (Cap. 112). The deduction applies to interest paid on a loan used solely to finance the purchase of a property that is occupied by the taxpayer as their place of residence. The property must be located in Hong Kong. The taxpayer must be the legal owner of the property and the borrower on the loan agreement. Joint owners—whether spouses, siblings, or business partners—may each claim a proportionate share of the interest, provided each meets the occupancy test.

The deduction is capped at HKD 100,000 per year of assessment per property, not per taxpayer. For jointly-owned properties, the HKD 100,000 cap is shared proportionally. For example, two siblings who own a flat 50/50 can each claim up to HKD 50,000, provided each sibling occupies the flat as their principal residence. The IRD’s Departmental Interpretation and Practice Notes (DIPN) No. 37 (Revised 2020) clarifies that the property must be the taxpayer’s “only place of residence” during the year of assessment. Owning a second property disqualifies the interest on both, unless the second property is let out on a qualifying tenancy.

What Interest Is Deductible—and What Is Not

Only interest on a loan taken specifically to finance the purchase of the property qualifies. Interest on a loan used to refinance an existing mortgage is deductible only if the refinancing loan is used to repay the original purchase loan. The IRD takes the position, confirmed in DIPN No. 37, that any portion of a refinancing loan used for other purposes—home improvements, personal expenses, or investment—renders the corresponding interest non-deductible. Taxpayers must maintain clear records tracing the use of refinancing proceeds.

Interest on a mortgage that exceeds the original purchase price is not deductible. For example, if a property was purchased for HKD 5 million and the mortgage is HKD 6 million, only the interest on HKD 5 million is eligible. The additional HKD 1 million is treated as a personal loan. The IRD applies a pro-rata calculation: interest paid × (original purchase price ÷ current loan balance). The deduction is also limited to interest actually paid in the year of assessment. Accrued but unpaid interest—common in interest-only mortgages or payment holidays—does not qualify.

The 20-Year Cap: A Hard Limit Many Overlook

Section 26E(3) imposes a 20-year cap on the deduction. Once a taxpayer has claimed the home loan interest deduction for 20 years of assessment (whether consecutive or not), no further deduction is allowed for that taxpayer on any property. The 20-year limit applies per taxpayer, not per property. A taxpayer who claims for 10 years on one property and 10 years on another has exhausted their entitlement permanently.

The IRD tracks this through the taxpayer’s tax return history. There is no statutory mechanism to “reset” the 20-year cap. Taxpayers who have already claimed for 15 years should plan carefully: they have only five years of deduction left. For those approaching retirement, accelerating mortgage repayments to reduce non-deductible interest may be more beneficial than stretching the loan term.

Strategic Claiming: Timing, Joint Ownership, and Switching Between Properties

Timing the Deduction: When to Claim and When to Defer

The home loan interest deduction is elective. A taxpayer may choose not to claim it in a given year if doing so would produce no tax benefit—for example, if their assessable income is already fully covered by other allowances and deductions. Section 26E does not require a claim to be made in every year. However, the 20-year cap runs from the year the deduction is first claimed, not from the year the loan was taken. Deferring the first claim can extend the usable life of the deduction.

Consider a taxpayer who purchased a property in 2020 but had low income in 2020/21 and 2021/22. If they defer the claim until 2022/23, the 20-year clock starts in 2022/23, not 2020/21. The IRD accepts this approach, as confirmed in the Inland Revenue (Amendment) Ordinance 2018 which codified the elective nature of the deduction. Taxpayers should review their tax position each year before the return filing deadline (generally 2 May for paper returns, extended to 2 June for e-filing) to decide whether to claim.

Joint Ownership: Maximising the Cap Through Strategic Elections

For married couples, joint ownership of the family home offers a clear opportunity. If both spouses are co-owners and co-borrowers, each may claim up to HKD 50,000 (half of the HKD 100,000 cap), provided both occupy the property. If only one spouse is the borrower, only that spouse can claim the full HKD 100,000. The IRD does not allow a non-borrower spouse to claim the deduction, even if they are a co-owner.

The optimal structure depends on each spouse’s marginal tax rate. If one spouse is a higher-rate taxpayer (the standard rate of 15% or the progressive rate up to 17%) and the other is a lower-rate taxpayer, it may be beneficial for the higher-rate taxpayer to be the sole borrower and claim the full HKD 100,000. Conversely, if both spouses are high earners, joint borrowing with a 50/50 split can double the deduction to HKD 100,000 total (HKD 50,000 each), though the cap remains HKD 100,000 per property. The IRD’s Tax Guide for Home Loan Interest Deduction (2024 edition) provides worked examples.

Switching Properties: Preserving the Deduction After a Move

Taxpayers who sell their home and buy a new one may continue claiming the deduction on the new property, subject to the 20-year cap. The deduction is not linked to a specific property; it is a personal allowance. Upon moving, the taxpayer must ensure the new mortgage qualifies as a “loan to finance the purchase” of the new property. A bridging loan used to cover the gap between sale and purchase may qualify if it is replaced by a permanent mortgage within a reasonable period (the IRD generally accepts up to 12 months).

The HKD 100,000 cap applies anew to the new property. A taxpayer who had claimed HKD 50,000 on the old property in a given year may claim up to HKD 100,000 on the new property in the same year, provided the old loan was repaid and the new loan was taken. The IRD does not aggregate the caps across properties in the same year. This is a common misconception.

Common Pitfalls and How the IRD Audits Claims

Overclaiming: The Most Frequent Audit Trigger

The IRD’s audit division, as noted in its Annual Report 2023/24, reviewed 12,400 tax returns for home loan interest deductions in that year, disallowing claims in 1,860 cases (15%). The most common reason was overclaiming—either claiming for a period when the property was not the taxpayer’s principal residence, or claiming for interest on a loan that exceeded the purchase price.

Taxpayers who rent out their property for part of the year must apportion the interest deduction. Only periods of owner-occupation qualify. The IRD accepts a time-based apportionment: if the property was rented for 3 months and owner-occupied for 9 months, only 9/12 of the annual interest is deductible. The IRD requires supporting documents, including tenancy agreements and proof of the taxpayer’s residence address during the period.

Failure to Maintain Records: The Burden of Proof

Under Section 51C of the Inland Revenue Ordinance, every person chargeable to tax must keep sufficient records for at least seven years. For home loan interest claims, this includes the loan agreement, mortgage statements showing interest paid, the sale and purchase agreement for the property, and proof of the property being the taxpayer’s principal residence (e.g., utility bills, bank statements, or employer records).

In the absence of these records, the IRD may disallow the claim entirely. The Board of Review has consistently upheld this position, as seen in D32/18 (2018), where a taxpayer’s claim was rejected for failure to produce mortgage statements. Taxpayers should retain digital copies of all documents for at least seven years after the year of assessment to which the claim relates.

Misunderstanding the “Principal Residence” Test

The IRD applies a strict “principal residence” test. A property is the taxpayer’s principal residence if it is the place where they ordinarily live. Temporary absences—such as holidays, business trips, or hospitalisation—do not break the test. However, a prolonged absence (over 12 months) for work or study may disqualify the property, unless the taxpayer can demonstrate an intention to return.

The IRD’s DIPN No. 37 provides examples: a taxpayer who works overseas for two years but retains the property for family use may not claim the deduction, as the property is not their principal residence during that period. The taxpayer must show that the property is their “only or main home” at the time the interest is paid.

Actionable Takeaways

1. File the claim electively each year only if it reduces your tax payable—deferring the first claim extends the 20-year cap, maximising future benefit.
2. Restructure joint ownership and borrowing so the higher-earning spouse is the sole borrower if that spouse’s marginal tax rate exceeds the other’s, to maximise the HKD 100,000 deduction.
3. Maintain a seven-year record of loan agreements, mortgage statements, and proof of residence to survive an IRD audit, referencing Section 51C of Cap. 112.
4. Apportion interest deductions correctly when the property is rented out for part of the year using a time-based calculation to avoid a 15% audit disallowance rate.
5. Review your remaining 20-year entitlement annually—if you have claimed for 15 years, plan to accelerate mortgage repayment to reduce non-deductible interest in the final five years.

本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。
This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.