New Negative Gearing Rules: What They Do To Your Borrowing Power

Negative gearing used to be something your accountant worried about at tax time. Under the 2026–27 reforms, it becomes something your bank and broker will worry about every time you ask for another loan.

From 1 July 2027, rental losses on many residential investments will be quarantined, instead of offsetting wages. That doesn’t just change your tax refund – it changes how much of your income is available to service debt, and how lenders think about your risk. In practice, that flows straight through to borrowing power, serviceability and the LVRs you’ll actually be offered.

This guide steps through the mechanics, shows the likely changes to lender calculators, and finishes with actions you can take this week.

1. Quick answer: how the new rules hit borrowing, serviceability and LVRs

Here’s the essence in one place.

1.1 What’s changing on the tax side

The 2026–27 Federal Budget and the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 do three big things for residential investors:

1. Quarantined rental losses for many established residential properties bought after 12 May 2026 – from 1 July 2027, losses generally can’t offset wage or business income; they’re trapped against future rental profit or capital gains.
2. Grandfathering of existing investments and (most) new builds – older properties and many new dwellings largely keep traditional negative gearing treatment.
3. Tighter CGT rules – the 50% discount is replaced by CPI indexation and a minimum 30% tax on most real gains for individuals and trusts from 2027 (see /insights/updated-cgt-rules-geared-property-investors-2027-playbook).

Commercial property and SMSFs sit largely outside these negative gearing changes for now, operating under their own rules.

1.2 What this means for borrowing power

For many investors and self‑employed borrowers, the effect will be:

• Lower effective after‑tax income where you previously used negative gearing to cut your PAYG tax bill.
• Higher visible cashflow strain – instead of the ATO absorbing part of the loss, you carry more of it in real time.
• Tighter lender behaviour – even though lenders don’t directly use your tax refund in servicing, they’ll adjust how they shade rent, test buffers and set max LVRs.

In numbers, we expect many investors to see 5–20% lower borrowing power on new established property deals, once lenders fully bake in the 2027 rules.

1.3 The 3 big transmission channels

The reforms reach your borrowing through three main levers:

1. Serviceability calculators – APRA’s 3% buffer still applies, but lenders are likely to assume:

   • lower usable rent (more shading), and
   • less tolerance for ongoing post‑tax cash losses.

2. Income volatility and buffers – quarantined losses make your position more sensitive to vacancies and rate rises, so many lenders will:

   • require stronger cash buffers, and
   • adopt more conservative assumptions for self‑employed income, dividends and trust distributions.

3. LVR and loan terms – some banks will:

   • reduce max LVRs for established investor stock, and
   • tighten interest‑only (IO) terms or price them more heavily.

If you remember nothing else, remember this:

New established residential investments must now stack up without counting any tax benefit, and lenders are moving their calculators in the same direction.

2. A 2‑minute refresher: how lenders actually measure serviceability

Before we overlay the new rules, it’s worth being clear about today’s baseline.

2.1 Core ingredients of a serviceability test

Every Australian lender has its own calculator, but nearly all follow the same broad recipe:

• Income (taxable and sometimes non‑taxable): salary, business income, trust distributions, rent, dividends.
• Adjustments: shading to overtime/bonuses and rental income; add‑backs for some non‑cash expenses.
• Living expenses: your declared spending, but never below the HEM benchmark for your household type.
• Existing commitments: mortgages, personal loans, cards, HECS/HELP.
• Assessment rate: your actual rate + at least 3% (APRA buffer) or a floor rate if higher.

Those ingredients are combined into a debt service ratio. If your surplus passes the bank’s threshold, you’re good. If not, you fail serviceability.

(We unpack these mechanics in more depth in /insights/apra-buffers-hem-rental-shading-next-geared-purchase and /insights/inside-lender-serviceability-calculators-broker-vs-online-tools.)

2.2 Key existing constraints for geared investors

Under current rules:

• APRA buffer – most lenders test at your rate + 3% (e.g. 6% actual -> 9% assessment), sharply cutting stated capacity.
• Rental shading – lenders typically use 70–80% of gross rent in calculators to allow for vacancies, costs and tax.
• Interest‑only assessment – IO loans are usually assessed as if they’re P&I over the remaining term at the higher assessment rate, reducing capacity for investors.

Existing guidance from APRA and prior reforms already make life hard for multi‑property borrowers. The new negative gearing rules are another layer on top.

3. How negative gearing currently interacts with serviceability

3.1 How banks viewed negative gearing up to now

Contrary to popular belief, most lenders do not directly plug your tax refund into their calculators. But negative gearing has still mattered in three ways:

1. After‑tax cashflow – your real‑world budget was cushioned by the ATO refund, making it easier to wear portfolio losses.
2. Declared living expenses – because the tax system subsidised some of your losses, you could meet expenses with less pre‑tax income.
3. Risk perception – a stable PAYG income plus tax‑assisted negative gearing looked more robust than the same losses with no tax back‑stop.

So while negative gearing wasn’t a formal line in the lender spreadsheet, it was an important background shock absorber.

3.2 A simple worked example (old world)

Assume:

• PAYG salary: $180,000
• Existing home loan: $700,000 P&I at 6%
• New investment: $800,000 established unit
• Rent: $700/week ($36,400/year)
• Interest (IO @ 6%): $48,000
• Other property costs: $10,000 (non‑interest)

The property runs at roughly:

• Rental income: $36,400
• Total costs: $58,000
• Pre‑tax loss: $21,600

Under the old negative gearing rules, that $21,600 can generally offset your salary. On a marginal tax rate of 39% (incl. Medicare), your tax bill drops by about $8,424, so your after‑tax cash loss is closer to $13,176/year (~$1,100/month).

Lenders don’t use the $8,424 as explicit income, but your real‑world budget is much closer to a $1,100/month hit than a $1,800/month hit. That matters when you’re stretching for your third or fourth property.

4. What the new negative gearing rules actually change

4.1 The key categories of property under the reforms

From the 2026–27 Budget and draft bill, we can broadly think in four buckets:

1. Grandfathered existing properties – established residential held before 12 May 2026 largely keep current negative gearing treatment.
2. New builds that qualify – most new residential dwellings continue to attract full negative gearing, to support housing supply.
3. Established properties bought after 12 May 2026 – from 1 July 2027, losses on many of these are quarantined: they can’t offset wages, just future rental income/capital gains.
4. Other structures – SMSFs, widely‑held trusts and some commercial property are mostly outside the negative gearing clamp, but have their own tests.

Definitions (e.g. what precisely counts as a "new residential dwelling") are being left to later regulations, which adds uncertainty.

4.2 How quarantined losses change your real cash position

Re‑run our earlier example, but assume the property is an established dwelling bought in August 2026.

• Pre‑tax rental loss remains $21,600.
• Under quarantine from 1 July 2027, you do not get to reduce your wage income.
• Your tax bill stays the same.
• Your after‑tax cash loss is the full $21,600/year (~$1,800/month).

The ATO is no longer sharing the pain. That extra ~$700/month needs to come from somewhere:

• higher salary or business profits,
• lower lifestyle spending,
• or higher debt on an offset‑funded buffer (which reduces future borrowing capacity).

Banks care because this extra strain pushes you closer to your own real‑world limits, even if their formal calculator hasn’t changed yet.

4.3 Interplay with CGT reforms

On exit, the move away from a 50% CGT discount towards CPI indexation and a minimum 30% tax rate on real gains further weakens the payoff for negatively geared strategies.

That means:

• Less incentive to run big cash losses today chasing a distant capital gain.
• More pressure to have the deal work on a pre‑tax and post‑tax cashflow basis without aggressive leverage.

We unpack those exit dynamics in /insights/updated-cgt-rules-geared-property-investors-2027-playbook.

5. How lender calculators are likely to respond

No bank has published a full 2027 calculator yet. But we can reasonably infer the direction of travel from APRA guidance, past reforms, and current practice.

5.1 What’s unlikely to change

Several parameters are structural and unlikely to move just because of tax law tweaks:

• APRA 3% buffer – still the central tool to protect households; expect it to remain.
• Use of HEM benchmarks – remains the floor for living expenses.
• General rental shading (70–80%) – still needed for vacancies and operating costs.

Expect these baselines, discussed in /insights/how-australian-lenders-assess-heavily-geared-property-investors, to persist.

5.2 Where we expect tightening

The new negative gearing landscape gives risk teams cover to be more conservative in areas that were already under review:

1. Treatment of ongoing rental losses

   • Currently, many calculators will allow a modest, fully evidenced rental loss to pass, as long as overall surplus is strong.
   • Post‑reform, we’re likely to see hard internal limits on how much aggregate portfolio loss a borrower can run and still qualify for more debt.

2. Rental income percentages and haircuts

   • Lenders may reduce usable rent on higher‑risk segments (e.g. short‑stay, regional, older stock) from ~80% to ~70% or even 60–65%.
   • We may see explicit distinctions between grandfathered properties, new builds, and post‑2026 established properties in calculators.

3. Self‑employed and trust income

   • With quarantined losses and new trust minimum tax rules, more focus will fall on sustainable cash profits rather than paper distributions.
   • Expect sharper scrutiny of add‑backs and non‑recurring income, especially when used to prop up negatively geared portfolios (see /insights/balancing-business-income-dividends-negative-gearing-after-budget).

4. Interest‑only tolerance and terms

   • IO periods may be shorter and more tightly targeted to clearly investment‑grade, lower‑LVR deals.
   • More investors may be nudged towards P&I earlier, to reduce long‑term portfolio losses.

5.3 A side‑by‑side comparison

Here’s an illustrative snapshot of how a given lender might adjust its stance. These are indicative only.