Understanding the new investment property servicing rules effective 12 May 2026, and what they could mean for your next purchase.
What Has Changed
Following the negative gearing legislation that took effect on 12 May 2026, lenders have updated how they assess borrowing capacity for investment property purchases. As with most policy changes like this, the effect is not limited to the tax outcome; there is a knock-on effect to how much you can borrow as an investment property owner. Whether negative gearing can still be used in your loan serviceability assessment now depends on when the investment property was purchased and whether it is a new build or an existing property.
| Purchased before 12 May 2026 | New build purchased after 12 May 2026 | Existing property purchased after 12 May 2026 |
|---|---|---|
| No change. Negative gearing benefits continue to apply as usual in the serviceability assessment. | No change. Negative gearing benefits are preserved for new builds. | Negative gearing can no longer be applied for servicing purposes, and your borrowing capacity could take a real hit. Interest expenses can still be used to offset rental income from that property. |
Case Study: A Real Borrowing Capacity Comparison
To illustrate the practical impact of this change, we modelled a client scenario across two lenders (one bank lender and one non-bank lender), comparing borrowing capacity before and after the change. Names and identifying details have been removed for privacy; the figures reflect a real serviceability assessment.
The Scenario
- Combined household income: $400,000 (two applicants), no dependants.
- Expenses: basic living expenses only, no personal insurance and no other liabilities (credit cards, car loans, personal loans).
- Existing investment property: one property already held, generating rental income of $800 per week.
- New purchase: an investment property for $1,300,000, with expected rental income of $800 per week.
- The client also refinances existing loans of $1,300,000 and uses cash drawn from the equity in the existing property (a cash-out) to help fund the purchase shortfall.
- The new investment loan is capped at 80% of the property value (an 80% loan-to-value ratio, or LVR) to avoid Lenders Mortgage Insurance.
Total Loan Required
| Item | Amount |
|---|---|
| Purchase price | $1,300,000 |
| Purchase costs (5%) | $65,000 |
| Funds required to complete the purchase | $1,365,000 |
| Plus: refinance of existing investment loan | $1,300,000 |
| Total loan required | $2,665,000 |
Maximum Borrowing Capacity: Before vs After 12 May 2026
| Bankwest (Bank Lender) | Resimac (Non-Bank Lender) | |
|---|---|---|
| Maximum loan, before 12 May 2026 (negative gearing benefit applied) | $2,816,450 | $2,787,500 |
| Maximum loan, after 12 May 2026 (negative gearing benefit not available) | $2,352,750 | $2,612,500 |
| Reduction in borrowing capacity | -16.46% | -6.30% |
| Interest rate, Principal & Interest | From 6.19% | From 6.39% |
| Interest rate, Interest Only | From 6.69% | From 6.69% |
Note: because the non-bank lender assesses serviceability at a higher interest rate, each dollar of income carries less borrowing power to begin with, so removing the negative gearing benefit has a smaller relative impact on its maximum loan amount.
The Bottom Line
| Purchased before 12 May 2026 | Purchasing after 12 May 2026 (existing property) |
|---|---|
| Both lenders’ maximum capacity ($2,816,450 and $2,787,500) exceeds the $2,665,000 required. Result: the purchase proceeds comfortably with either lender. | Both lenders’ maximum capacity ($2,352,750 and $2,612,500) now falls short of the $2,665,000 required. Result: on these figures, this same purchase could not proceed with either lender after the change. |
In this case, removing negative gearing from the servicing assessment does not just reduce the size of the loan a client can obtain; it can be the difference between a deal proceeding and a deal falling over entirely, even where the client’s income, expenses and rental yields have not changed at all.
What This Means for You
- If you already purchased your investment property before 12 May 2026, there is no change; negative gearing continues to be applied in your serviceability assessment as usual. It may still be worth reviewing your options: for example, purchasing a new property to live in and renting out your existing one instead. This needs proper tax advice and careful structuring so you do not miss out on the tax deductions for your existing property.
- If you are planning to purchase a new build after 12 May 2026, negative gearing benefits are preserved and your borrowing capacity is unaffected by this change.
- If you are planning to purchase an existing investment property after 12 May 2026, your borrowing capacity for servicing purposes could take a real hit, reduced by roughly 10% to 20%, depending on the lender.
- The lender you choose matters more than ever. As shown above, non-bank lenders may offer meaningfully higher borrowing capacity under the new rules, even with a higher headline interest rate.
Get Your Numbers Checked
Every client’s situation is different, and small changes in structure, timing or lender choice can materially change your borrowing outcome under the new rules. If you are planning your next purchase, or have an application sitting in a lender’s pipeline, get in touch before you go further; it could be the difference between a deal that stacks up and one that does not.
