One of the most underused strategies is knowing how to use negative gearing to increase borrowing capacity, and most banks won’t tell you this.
This week we want to share a real client scenario from our desk that illustrates exactly why getting a second opinion from an independent mortgage broker can be the difference between buying an investment property or not.
What is negative gearing, and why does it matter for borrowing?
Negative gearing occurs when the costs of owning an investment property (interest, management fees, maintenance) exceed the rental income it generates. In Australia, that shortfall has been tax-deductible, which reduces your taxable income – and therefore the actual out-of-pocket cost of holding the property.
The majority of lenders have traditionally taken this tax benefit into account when running their servicing assessments, which would effectively reduce the borrowing power of investors. Since the recent Federal Budget, the majority of lenders have removed the ability to factor in negative gearing, unless it is a brand new property.
What does the 2026–27 Federal Budget mean for negative gearing?
This case study is particularly timely given the significant changes announced in the May 2026 Federal Budget.
The government has announced that negative gearing on established residential properties will be abolished from 1 July 2027 – but only for purchases made after 7:30pm on 12 May 2026. This means: Properties already held, or under contract, before Budget night are fully grandfathered – meaning existing investors can continue to negatively gear those properties under the old current rules for as long as they hold them.
- New builds remain exempt – investors purchasing newly constructed properties will still be able to access negative gearing and the existing 50% CGT discount.
- Established properties purchased after Budget night will only be able to offset rental losses against other rental income or future capital gains – not against wages or other personal income. Any unused losses can be carried forward.
The government has also announced changes to capital gains tax, replacing the 50% CGT discount with cost base indexation and a 30% minimum tax rate on gains accruing after 1 July 2027.
What does this mean for borrowers moving forward:
Moving forward almost all lenders have removed the ability for borrowers to take into account negative gearing when they are considering purchasing an existing property. Most lenders are still allowing negative gearing to be included in the calculations for brand new properties. This change is having a significant impact on investors’ borrowing capacities.
Case study: The borrowing power of negative gearing and brand new property versus existing property
One of our clients came to us already holding an investment property. She earns $155,000 per year and wanted to leverage her position to buy again – but wasn’t sure how much she could realistically spend.
When we ran her serviceability without factoring in negative gearing benefits for an existing property, the borrowing numbers were as follows:
- Best available borrowing capacity: ~$794,000
- Realistic purchase price given her deposit and funds position: around $650,000
That’s a reasonable outcome, but it would really limit the type of investment property our client could access.
When we ran the scenario based on the purchase of a brand new property – applying negative gearing to her existing investment property and the new purchase – her borrowing capacity jumped significantly:
- Best available borrowing capacity: ~$1,095,000
- Realistic purchase price: up to $900,000
That’s a $250,000 increase in her purchasing power, simply by structuring the application the right way. While many lenders assessed the client’s income conservatively, the right lending strategy resulted in a significantly higher borrowing capacity.
Why a second opinion matters
One of the biggest misconceptions in lending is that if one bank says no, every bank will say no. In reality, every lender has different credit policies, servicing models and ways of assessing income.
What one lender declines, another may be completely comfortable with.
That’s why getting a second opinion can be so important, particularly for investors, self-employed clients, Defence Force members, or borrowers with more complex income structures. A good mortgage broker can assess which lenders are most likely to provide the best borrowing outcomes, which can be the difference between purchasing an investment property or not.
Thinking about your next property move?
If you’ve been told by your bank that they can’t help – or you’re not sure whether you’re seeing your true borrowing capacity – we’d love to chat.
At Fabe Financial, we’re independent, we work around your schedule and we do the heavy lifting so you don’t have to.