The key benefit associated with negative gearing is that the loss associated with the property ownership can be offset against other income earned, reducing your assessable tax income, thereby reducing the amount of tax payable.
Recent changes for Investment Loans
In May-2015 we wrote that there have been some important lending changes for investment loans by the major Australian lenders. APRA (http://www.apra.gov.au/Pages/default.aspx) has suggested to Australian lenders that the level of investment lending is on its radar. As such, many Australian banks have reduced their appetite for investment lending. They have done this by reducings the maximum LVR they are willing to lend to for investment loans. Or course, banks have also increased the interest rate charged relative to owner occupied loans. APRA may, in the future, recommend that banks hold more capital aside for investment loans relative to owner occupied loans. This is the excuse banks are using to increase investment interest rates and getting you to pay more.
Recent Bank changes
Since then (May-2017) there have been major changes in the way banks lend to and price investment loans. Recently, APRA has:
- Put a maximum limit on the growth of investment lending in Australia to 10.0% per annum. http://www.apra.gov.au/MediaReleases/Pages/14_30.aspx
- Increased the lending restriction of Australian banks based on Interest Only lending. http://www.apra.gov.au/MediaReleases/Pages/17_11.aspx . There is now a limit on interest only lender to 30% of total new lending and new strict limits on interest only loans to LVR above 80%.
This increased scrutiny on interest only loans does make sense. At Orange Mortgage and Finance Brokers, we never recommend interest only home loans to owner occupiers. For investment properties however, in certain circumstances it does make sense to have interest only loans. Previously when there was no pricing difference between principal and interest payments versus interest only loans most investors had interest only loans. Now that there is a significant price difference, even with any tax benefits, it is likely that increased interest costs don’t outweigh the benefits.
Update: As of Dec-2020. APRA earlier this year relaxed restrictions on investment lenders so lenders are back in the market to win investor business. The difference between owner occupied interest rates and investor rates has reduce back to within 0.2% for a lot of lenders.
Get proper tax advice first.
The most important thing to consider if you are thinking about buying an investment property is to get proper tax advice and financial planning advice. We strongly recommend you make some time to meet with your trusted accountant and/or financial planner.
We have seen many clients who didn’t speak to their financial adviser and entered into a property investment which could have been structured more appropriately to better meet their needs.
Depending on your circumstances, investment property loans can be for:
Laszlo has over 20 years experience in finance so he is more than comfortable speaking with accountants and financial planners about setting up the correct structure for you. At Orange, we make sure the best financial structure compliments the financing options available.