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The government and ruling camp plan to lower the tax exemption rate for housing loan borrowers to 0.7% from the current 1%, sources familiar with their discussions said Monday.

Amid low interest rates, housing loan rates are below 1% per year in many cases, giving borrowers unduly preferential treatment under the current system. The cut in the tax exemption rate is aimed at correcting the problem, the sources said.

Government and ruling coalition officials aim to include the reduction in annual tax system reform proposals for fiscal 2022, which starts in April, the sources said.

Currently, 1% of the outstanding balance of housing loans at the end of a calendar year is deducted mainly from the income taxes of eligible borrowers.

In order to cushion the impact of the reduction, the duration of the tax breaks will be set at 13 years in 2022 and 2023, compared with 10 years in principle and a maximum 13 years at present, the sources said. The period will be set at 10 years in 2024 and 2025, they said.

The officials aim to lower the maximum amount of outstanding housing loans eligible for the tax exemption from the current ¥40 million to ¥30 million.

Under their plans, the tax break duration will be kept unchanged at 13 years until 2025 for long-life quality houses such as those with energy-saving functions. For such houses, the maximum amount of outstanding housing loans eligible for the tax breaks will be kept unchanged at ¥50 million.

The government and ruling coalition officials are aiming to promote purchases of environmentally friendly housing as part of efforts to achieve their goal of reducing Japan's greenhouse gas emissions effectively to zero by 2050.

Low interest rates have been causing negative spreads in which the amount of tax credits exceeds that of interest payments. Critics say the current system offers greater benefits to people who can take out large amounts of housing loans at low rates. In 2019, the Board of Audit of Japan pointed out the situation as a problem.

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