Question

Interest on a home mortgage is tax deductible. Explain why interest paid in the early years of a home mortgage is more helpful in reducing taxes than interest paid in later years.

Answer 1

Consider below amortization schedule for a sample mortgage loan:

Period	Opening liability	Total payment	Interest payment	Loan repaid	Closing liability
N	A	C	B= A* 0.120000	D=C-B	E=A-D
1	200,000.00	35,396.83	24,000.00	11,396.83	188,603.17
2	188,603.17	35,396.83	22,632.38	12,764.45	175,838.71
3	175,838.71	35,396.83	21,100.65	14,296.19	161,542.53
4	161,542.53	35,396.83	19,385.10	16,011.73	145,530.80
5	145,530.80	35,396.83	17,463.70	17,933.14	127,597.66
6	127,597.66	35,396.83	15,311.72	20,085.11	107,512.55
7	107,512.55	35,396.83	12,901.51	22,495.33	85,017.22
8	85,017.22	35,396.83	10,202.07	25,194.77	59,822.45
9	59,822.45	35,396.83	7,178.69	28,218.14	31,604.32
10	31,604.32	35,396.83	3,792.52	31,604.32	0.00

Interest payment reduces year on year. Less interest expense means lesser tax deduction.

It is the reason interest paid in the early years provides more tax deduction.