Imagine you're an investor who bought a Sydney apartment in 2024 with a $600,000 loan at 6.2% interest. Your rental income is $30,000 a year, but your interest costs are $37,200. Under the old rules, you claimed the $7,200 loss against your salary. But from July 2026, the new negative gearing cap limits your interest deduction to 80% of rental income—that's just $24,000. Suddenly, you're paying tax on phantom income. Ouch.
But here's the twist: while most investors are scrambling, a small group might actually benefit from these changes. Yes, you read that right. The new rules, designed to curb property speculation, could accidentally hand advantages to certain borrowers. Let's break down who wins, who loses, and how you should compare your home loan strategy in this new landscape.
The Surprising Winners: Investors with Low Debt or High-Yield Properties
The new negative gearing rules cap interest deductions at 80% of rental income for properties purchased after 1 July 2026. This means if your interest costs exceed 80% of your rent, you can't claim the full loss. But here's the accidental favour: investors who already have low loan-to-value ratios (LVRs) or properties in high-yield suburbs may find their tax position improves relative to highly leveraged peers.
Consider two investors buying identical $500,000 units in Brisbane. Investor A puts down 40% ($200,000) and borrows $300,000 at 6.5%. Their annual interest is $19,500, and rental income is $26,000 (5.2% yield). Under the new rules, the maximum deduction is 80% of $26,000 = $20,800. Since their interest ($19,500) is below that cap, they claim the full amount—no change. But Investor B puts down only 10% ($50,000) and borrows $450,000. Their interest is $29,250, but the cap is still $20,800. They lose $8,450 in deductions.
The result? Investor A effectively gets a tax advantage over Investor B, even though they have the same property. This accidentally rewards conservative borrowing—something the government didn't explicitly intend. For you, this means comparing loan products isn't just about rates anymore. It's about how much debt you carry relative to your rental yield.
How the Cap Changes Borrowing Power Calculations
Before the 2026 changes, lenders assessed borrowing power based on your ability to service the loan, including negative gearing benefits. Now, with the cap reducing tax refunds for highly leveraged investors, your borrowing capacity may shrink—unless you adjust your strategy.
Let's run the numbers. Suppose you earn $100,000 salary and want to buy a $600,000 investment property with a 20% deposit ($120,000 loan). At 6.5% interest, annual costs are $31,200. If rental income is $28,800 (4.8% yield), your net loss is $2,400. Under old rules, you'd get a tax refund of about $960 (assuming 40% marginal rate). Under new rules, your deduction is capped at 80% of $28,800 = $23,040, so you can't claim the full $31,200. Your taxable income increases by $8,160, costing you an extra $3,264 in tax. That's a $4,224 swing—enough to push your debt-to-income ratio over lender limits.
But here's where comparison matters: not all lenders treat this the same. Some major banks are already adjusting their serviceability calculators to account for the cap, while smaller lenders lag behind. If you're comparing home loans, you need to check which lenders use "actual interest" versus "capped interest" in their assessments. At ozLoan, we've seen lenders like CBA and Westpac adopt stricter models, while non-bank lenders may offer more flexibility—but at higher rates.
Strategic Workarounds: Interest-Only Loans and Offset Accounts
The new rules create a curious incentive for interest-only (IO) loans. Since the cap is based on rental income, not total interest, reducing your loan balance through principal repayments doesn't help your deduction limit—it just reduces your actual interest. But with an IO loan, your interest stays constant (or even rises if rates increase), which could push you over the cap.
However, there's a smarter workaround: offset accounts. If you park extra savings in an offset account, your interest costs drop, bringing you closer to the 80% cap. For example, if you have $50,000 in an offset, your effective loan balance falls from $500,000 to $450,000, saving you $3,250 in interest annually. That $3,250 reduction might bring you under the cap, allowing you to claim all your remaining interest.
But beware the trap: some lenders charge higher rates for IO loans (often 0.2-0.5% more than P&I). You need to compare whether the rate premium outweighs the tax benefit. A recent analysis by Canstar found that for investors with $400,000+ loans, P&I loans with offset accounts often beat IO loans on after-tax cost—even with the new cap.
The Refinancing Dilemma: Should You Switch Lenders Now?
If you already own an investment property purchased before 1 July 2026, you're grandfathered under old rules—no cap applies. But if you refinance, some lenders treat the new loan as a "new purchase," triggering the cap. This is a massive grey area.
The Australian Tax Office (ATO) hasn't issued definitive guidance on refinancing. Some tax advisors argue that refinancing with the same lender doesn't trigger the cap, while switching lenders might. This creates a perverse incentive to stay with your current lender, even if they offer uncompetitive rates.
For example, ANZ currently offers 6.25% for existing investors, while a challenger like ubank offers 5.99% for new loans. If you switch to ubank, you might lose $4,000 in deductions annually—wiping out the $1,300 rate saving. You need to calculate your break-even point. Use our comparison calculator to see if the rate difference justifies the potential tax loss.
Frequently Asked Questions
Q: Do the new rules apply to properties bought before July 2026? A: No. Properties purchased before 1 July 2026 are grandfathered under existing rules. However, if you refinance with a different lender, the ATO may treat the new loan as a "new arrangement," potentially triggering the cap. Always consult a tax professional before refinancing.
Q: How do I calculate my new deduction limit? A: It's simple: take your gross rental income (excluding expenses) and multiply by 80%. That's your maximum interest deduction. For example, if your rent is $30,000, you can deduct up to $24,000 in interest—even if your actual interest is $40,000.
Q: Can I use a trust or company structure to avoid the cap? A: Possibly, but the rules target "residential rental properties" held by individuals. Trusts and companies may be treated differently, but the ATO has flagged anti-avoidance measures. High-net-worth investors should seek specialist advice.
Q: Will the cap affect my ability to get a loan? A: Yes. Lenders assess serviceability based on your net rental income after tax. With reduced deductions, your taxable income rises, lowering your borrowing power. You may need a larger deposit or higher income to qualify.
Sources
- Australian Taxation Office. "Changes to negative gearing for residential rental properties." ATO.gov.au, June 2026.
- Canstar. "Interest-only vs principal and interest loans for investors." Canstar.com.au, July 2026.
- Property Investment Professionals of Australia. "Negative gearing reform impact analysis." PIPA.asn.au, July 2026.
Disclaimer: This article provides general information only and does not constitute financial or tax advice. Always consult a qualified professional before making investment decisions.