Do you know how investment loans changed in 2026?

What changed for investment property borrowing from May 2026

Two Commonwealth Acts received royal assent on 26 June 2026, fundamentally altering how residential investment property losses and capital gains are treated from the 2027-28 income year. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 restricts negative gearing for established properties acquired after 7:30pm AEST on 12 May 2026, and the Income Tax Rates Amendment (Tax Reform No. 1) Act 2026 introduces a 30 per cent minimum tax rate on real capital gains accruing from 1 July 2027.

Consider a judicial officer acquiring an established apartment in July 2026. Under the new provisions, losses from that property can only be offset against income from other residential properties, not salary. Excess losses carry forward but remain quarantined to residential property income. A colleague who settled on a comparable property in April 2026 continues to deduct losses against all assessable income until disposal.

Grandfathering provisions and what they protect

Properties held at 7:30pm AEST on 12 May 2026, including those under contract awaiting settlement at that moment, retain full negative gearing treatment indefinitely. Losses from these properties remain deductible against salary, wages, and other income. The grandfathering also applies to eligible new builds acquired after that date, provided the dwelling was constructed on vacant land or the development increased the number of dwellings on the site. A knock-down rebuild that does not increase dwelling numbers does not qualify.

A new build occupied for more than 12 months before sale to a subsequent investor loses access to negative gearing for that purchaser. The timing distinction is absolute. Settlement date, not contract date, determines whether a new build qualifies, but for established properties, both contract and settlement must occur on or before 12 May 2026 to be grandfathered.

How APRA's debt-to-income limit applies to investor borrowing

From 1 February 2026, ADIs may lend a maximum of 20 per cent of new investor loans each quarter to borrowers with a total debt-to-income ratio of six times or greater. The limit applies separately to owner-occupier and investor lending portfolios and is measured at institution level, not borrower level. A judicial officer with total borrowings of six times annual income would fall within the portion of lending subject to the quarterly cap, though approval remains possible if the lender has capacity within that 20 per cent threshold.

The DTI calculation includes all personal debt secured and unsecured, divided by gross annual income. Investment property rental income is not added to the income figure unless the lender's serviceability policy permits it, and most ADIs apply a discount or haircut to rental income to account for vacancy and maintenance periods. Non-ADI lenders are not currently subject to the DTI limit, though APRA holds powers under Part IIB of the Banking Act 1959 to extend the measure if required.

Calculating serviceability with the 3 per cent buffer

All ADIs assess new residential investment loan applications at an interest rate at least 3 percentage points above the product rate. The buffer has been set at this level since October 2021 and was confirmed again on 28 May 2026. For a variable rate product priced at current levels, the serviceability assessment would be conducted at a materially higher rate, reducing maximum borrowing capacity compared to the period before October 2021.

The buffer applies to new borrowers only. Existing borrowers seeking to vary their loan, including switching from principal and interest to interest-only, may be subject to a fresh serviceability assessment depending on the lender's credit policy and the nature of the variation. ADIs may apply exceptions to the buffer in limited circumstances, but these exceptions account for less than 5 per cent of new housing lending and are subject to internal risk appetite limits.

Risk weighting under APS 112 and its effect on pricing

Prudential Standard APS 112, which commenced on 1 July 2025, prescribes specific risk weights that ADIs apply to residential mortgage exposures based on loan classification, occupancy status, and LVR. Investment loans attract higher risk weights than owner-occupied loans at the same LVR, and interest-only loans attract higher risk weights than principal and interest loans. Higher risk weights increase the capital an ADI must hold against the exposure, which flows through to the rate offered to the borrower.

For a loan to be classified as standard, the ADI must hold unequivocal enforcement rights including a right to possession and power of sale in the event of default, the exposure must be secured by a registered first mortgage, and a positive serviceability assessment must be completed. Where multiple loans are secured over the same property in sequential ranking with no intermediate lender, the amounts are aggregated for LVR calculation. Offset account balances do not reduce the loan amount for LVR purposes under the standard.

Capital gains tax from 1 July 2027

The 50 per cent CGT discount for individuals, trusts and partnerships is replaced from 1 July 2027 by cost base indexation using CPI and a 30 per cent minimum tax rate on real capital gains. Investors index the cost base of their assets in line with inflation and pay tax on above-inflation profits only. For assets owned before 1 July 2027 and sold after that date, gains are taxed under the current rules for the portion accruing before 1 July 2027 and under the new rules for the portion accruing after that date.

Taxpayers may either obtain a market valuation as at 1 July 2027 or apply an ATO-published apportionment formula. For investors in eligible new builds, both the existing 50 per cent discount and the new indexation and minimum tax arrangements are available as a choice at disposal. The minimum rate applies only to the post-1 July 2027 indexed portion of a gain and only where the taxpayer's effective rate on that portion is below 30 per cent. Recipients of certain government payments, including the Age Pension and Disability Support Pension, are exempt from the minimum rate in any financial year they receive such a payment.

Interest-only terms and APS 112 classification

A long-term interest-only residential loan is classified as non-standard where the LVR exceeds 80 per cent and the contractual interest-only period is greater than five years or is not specified. Non-standard classification attracts a higher risk weight, which in turn increases the lender's capital requirement and typically results in a higher rate or a declined application. Most ADIs now cap initial interest-only periods at five years for investment loans above 80 per cent LVR to avoid non-standard classification.

A non-standard loan that does not meet the serviceability criteria under APS 112 but has been performing consecutively for 36 months may be reclassified as standard. The distinction between standard and non-standard is significant for both pricing and ongoing portfolio management. Borrowers seeking to extend an interest-only period beyond five years on a loan above 80 per cent LVR should expect either a rate increase or a requirement to reduce the LVR below 80 per cent before the extension is approved.

Foreign investment restrictions on established dwellings

Foreign persons, including temporary residents and foreign-owned companies, are generally banned from purchasing established dwellings in Australia from 1 April 2025 to 30 June 2029. The ban was originally set to end on 31 March 2027 and was extended by more than two years as part of the 2026-27 Budget. Limited exceptions apply, including investments that significantly increase housing supply and certain Build to Rent developments. Temporary residents can still apply for FIRB approval to purchase new dwellings or vacant land. Application fees for established dwelling exceptions were tripled from 1 April 2025.

Foreign investors who acquire vacant residential land are generally subject to a condition that construction be completed within four years and that the land not be sold until construction is complete. The ATO received additional funding in the 2025-26 and 2026-27 Budgets to enforce development conditions and target land banking. Compliance and enforcement is administered by the ATO, including through an audit program funded through $8.9 million allocated over four years from 2025-26 and $1.9 million ongoing from 2029-30.

Structuring borrowing for multiple properties

Judicial officers expanding their property portfolio should consider how the new negative gearing rules interact with existing holdings. A borrower who acquired a residential investment property before 12 May 2026 and acquires a second established property in 2027 will have two different tax treatments operating simultaneously. Losses from the first property remain deductible against all income, while losses from the second property are quarantined to residential property income only.

This creates an incentive to structure borrowing so that the grandfathered property carries a higher level of debt relative to its value, maximising the deductible interest expense on that asset. Debt recycling strategies, where equity is released from a grandfathered investment property to fund the deposit on a new acquisition, may allow a borrower to preserve a higher proportion of deductible interest. The alternative, paying down the grandfathered loan and borrowing heavily against a post-May 2026 property, reduces the total amount of interest deductible against salary.

Lenders mortgage insurance and LVR thresholds

LMI is generally required by ADIs on residential investment loans where the LVR exceeds 80 per cent. The premium is a cost borne by the borrower and is calculated on a sliding scale based on the loan amount and LVR. To be eligible for capital relief under APS 112, the insurance must provide cover for all losses up to at least 40 per cent of the higher of the original loan amount and the outstanding loan amount, and must be provided by a lenders mortgage insurer regulated by APRA.

Some lenders offer LMI waivers for specific professions, including judicial officers and legal practitioners, up to a specified LVR, typically 90 per cent for investment lending. Where a waiver applies, the borrower avoids the upfront premium cost, though the lender's risk weight on the exposure remains higher than it would be for a loan below 80 per cent LVR. State and territory stamp duty may be payable on the LMI premium in some jurisdictions, adding to the upfront cost where the premium is charged.

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