Property investors are being told their borrowing power has been wiped out in the wake of the government decision to restrict negative gearing perks in the recently unveiled federal budget.
Mortgage brokers reported that major lenders have already begun to factor in the loss of negative gearing perks into their assessments of investors’ borrowing power, despite the changes only taking effect in 2027.
The typical reduction in the amount banks will lend new investors was about 30 per cent in some instances, one broker claimed.
This change in borrowing power calculations has meant some investors who were eligible for loans over $1.1m before the Budget release will only be able to borrow about $800,000.
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Under the new negative gearing rules to start in July 2027, negative gearing concessions that allow investors to offset their losses against their taxable income will only be available on newly-built homes.
Australian Treasurer Jim Chalmers announced last week negative gearing could be cut for those buying established homes from July 2027. Picture: Hilary Wardhaugh/Getty Images
Investors who owned properties before Budget night will have their gearing concessions grandfathered. New purchasers who buy before July 2027 will be able to negative gear until that date, but will have their benefits cut when the reforms take effect.
Owl Home Loans director Aidan Hartley said some individual applications were already being knocked back on account of the coming negative gearing changes.
Most banks have yet to make public announcements of policy changes, but it was clear that at least two of the nation’s five biggest banks were already re-evaluating investor loans, Mr Hartley said.
“At the moment it appears to be case-by-case, but there has been communication to brokering channels that borrowing power calculations have changed.”
Mr Hartley said the change has taken the industry by surprise as negative gearing reforms will only be implemented next year.
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Agents have reported auction activity has been quieter with fewer investors in the market. Picture: Sam Ruttyn
“It’s a bit of a knee-jerk reaction,” Mr Hartley said. “We knew it was coming, but because the restrictions don’t apply until next year, we just didn’t expect the banks to react so soon.”
Mr Hartley said he expected other lenders to soon follow.
“This will probably pave the wave for other lenders to do it. This could be the first domino of many.
“With 30 per cent less borrowing power, investors will be removed from (contention) for a lot of properties.”
Kingfisher Finance founder and broker Alex Gee said it became apparent some lenders were reducing their exposure to investors on Wednesday morning, mere hours after the budget release.
Mr Gee, based in Brisbane, said he had clients who had their pre-approvals knocked back because they could no longer receive negative gearing benefits.
One client was told their borrowing power would reduce by $380,000, Mr Gee said.
RBA governor Michele Bullock has announced three back-to-back rate hikes, which have also discouraged new investment activity. Picture: NewsWire / Christian Gilles
“I work a lot with mum and dad investors and rentvestors. This client base has been heavily impacted by the changes across the board,” Mr Gee said.
He explained that some recent pre-approvals had been knocked back after credit assessors revealed they had received internal bank communication that negative gearing could no longer be factored into serviceability calculations.
Investors were discovering amounts they would have been able to borrow before the Budget are no longer possible, Mr Gee said.
“We were told that unless a contract had been signed pre-budget, they couldn’t give us pre-approval (on that amount) because servicing (the loan) could no longer be achieved.”
And in one alleged incident, revealed by a Western Sydney broker on social media, an investor couple who purchased a rental home at auction last week learned after the sale that their loan was knocked back.
Recent tax reforms have been controversial because the PM said prior to the last election that negative gearing changes were not being considered.
The couple were alleged to have gone to auction with pre-approval to borrow $800,000 but were told after the sale that they would only get a loan for $500,000 due to the loss of the tax perk.
The investors had reportedly already paid a 10 per cent deposit, according to the broker linked to the sale.
Mr Gee said most mum and dad investors would be pushed out of the market by the negative gearing reforms as they could not afford to make new investments without the benefit.
“Most mum and dad investors rely heavily on negative gearing,” he said.
“These investors often draw out equity from their homes to use to purchase investment properties and then take out an additional loan on the investment itself. Effectively they borrow 100 per cent.
A third of households rent in Sydney, but with fewer new rentals coming to market, there could be a rental supply shortage. Picture: Sam Ruttyn
“There is no way they can support these investments on the rental income alone. It’s not enough.”
He explained that few investors were likely to transition to new builds. “Most have communicated to us they see buying new as too risky.”
Mr Gee said he feared drops in investment activity could be so extreme they would exacerbate current rental shortages.
Investors with existing pre-approval for a loan should be cautious, Mr Hartley added.
“With some lenders, pre-approval is not a guarantee,” he said, adding that aspiring buyers should contact their lender or broker to get an update on their borrowing power.
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