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plenty of countries.
There's a wiki for this
https://en.wikipedia.org/wiki/Home_mortgage_interest_deduction
Turns out the UK allowed mortgage interest payments as a deduction from 1983 to 2000
Owner occupied homes should have a tax rebate on interest repayments. Seems to work just fine in plenty of countries. e.g. £12,000 annual interest repayment is taken out of gross earnings and lowering your taxable income. If you’re living mortgage free than it incentives to upgrade your home or otherwise pay full taxes.