Negative Gearing

There has been increased talk over the past few weeks on Negative Gearing. The Greens especially believe it will help resole the country’s housing crisis. But what is it.

Negative gearing is a situation where an investor spends more on the costs of their rental property (interest, bank fees, strata fees, maintenance and upkeep) than they receive in rent. It means they made a loss on their investment for that financial year. And in Australia that loss can be deducted from their taxable income when they do their tax returns.

The Greens argue that it is only for the rich, yet the clients I have with investment loans do not fit in that income class. Most are normal Mum & Dad’s and have only one investment property.

In early 2022 interest rates were low 2%, but now they are low 6%. Whilst rents have increased, they have not increased that much in 2 years. The said property may have been positively geared in 2022 but now mostly likely to be negatively geared. Negative Gearing assisting the client retain the property and keeping someone housed.

Most lenders will factor in negative gearing when assessing a loan application. However, their assessment of rental income and expenses can widely differ.

With high property prices, it can be hard to find properties that earn enough rent to cover the mortgage. If negative gearing wasn’t an option, investing wouldn’t be so attractive. Many believe negative gearing has helped push up property prices by driving demand among investors. Since the bulk of investors buy established properties, they compete against homebuyers for housing, which tightens supply even more.

Nationally, just over 36 per cent of all housing finance in December 2023 went to investors, ABS figures show, up from about 23 per cent in the final months of 2020 as buyers bank on the chance of improved investment returns. The last time it was higher was in 2017. This compares with the first-home buyer share of finance which is about 18 per cent, and has also been picking up but remains a smaller slice of the pie than during the Home Builder grant era.

If you would like to know how which lender’s view “Negative Gearing” please email me at phil@phaservices.com.au

This information has been prepared by PHA Financial Services and does not take into account your objectives, financial situation or needs. Before acting on this information you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The information provided was accurate at the time of publication and changes in circumstances after a document is published may impact on the accuracy of information. Some information may have been collated from various third parties and we make no assertion that the information was originally ours.