A Sydney investor signed a contract, paid a holding deposit, then discovered her bank had slashed her negative gearing borrowing power by 36 per cent before settlement. The recalculation happened the week after the May budget announced restrictions on negative gearing for established homes purchased after July 2027. Her pre-approval dropped from two properties up to $700,000 each to one property up to $450,000. She walked away from the deal at a loss.
This isn’t a story about policy outcomes in 2027. It’s about execution risk in 2025. Lenders updated their serviceability models immediately after the budget announcement, while investors were still under contract with financing based on pre-budget assumptions. The timing gap between policy announcement and settlement created a window where borrowing capacity could vanish before a deal closed.
The mechanical detail most people missed
Negative gearing allows investors to offset rental losses against taxable income. The budget change removes that deduction for established homes purchased after budget night, effective July 2027. Banks factor tax deductions into serviceability calculations because they affect post-tax cashflow. When the deduction disappears, the investor’s cashflow buffer shrinks, so borrowing capacity falls.
The investor in question hadn’t planned to be negatively geared. The property she’d signed for was expected to break even or generate a small surplus. But serviceability models don’t care about individual intentions, they apply blanket assumptions about rental yields, vacancy, interest coverage and tax treatment across all investor loans. The model assumes negative gearing is part of the structure, so when it’s removed, the algorithm recalculates capacity downward even if the specific property wouldn’t have used it.
A broker network reported clients losing up to 40 per cent of their borrowing power in the week after the budget. The range reflects differences in income levels, existing debt, interest rate buffers and how heavily the original serviceability relied on the tax offset. Higher-income borrowers with lower debt loads saw smaller haircuts. Marginal borrowers, those already close to serviceability limits, saw the biggest drops.
Key numbers
- Pre-approval capacity: two properties up to $700,000 each
- Post-budget capacity: one property up to $450,000
- Reduction: 36 per cent
- Policy effective date: July 2027 (for purchases after budget night)
- Lender system update: within one week of budget announcement
- Typical settlement period: 30-90 days
The execution window nobody priced
Pre-approvals aren’t guarantees. They’re conditional offers based on stated income, declared debts and current policy settings. If any of those inputs change before formal approval, the lender recalculates. Policy changes count as input changes.
Settlement periods in Australia typically run 30 to 90 days. A buyer who exchanged contracts two weeks before the budget and settled six weeks after would have been exposed to this recalculation risk for the entire second half of the settlement window. If their borrowing power dropped below the contract price during that window, they’d face three options: find additional equity, renegotiate the contract price, or walk away and forfeit the deposit.
The investor in this case chose option three. She accessed equity from a Perth property to cover upfront costs, then pivoted to a cheaper property in a different suburb, an apartment in Caulfield instead of a house in Craigieburn. The new purchase was structured to be cashflow-neutral or positive, which reduced her exposure to the negative gearing recalculation.
But the loss on the abandoned contract, holding deposit plus costs, was real. And the broader risk remains live for anyone who exchanged before the budget and hasn’t yet settled.
What changes between now and 2027
The policy doesn’t take effect until July 2027, and only applies to purchases made after budget night. Properties exchanged before budget night are grandfathered. But lenders updated their models immediately because serviceability assessments have to reflect the rules that will apply during the loan term.
This creates two cohorts. Investors who settled before lenders updated their systems kept their original borrowing capacity. Investors who hadn’t yet received formal approval, even if they’d exchanged contracts based on a pre-approval, got recalculated under the new settings.
The policy itself still faces parliamentary approval. If it doesn’t pass, or if the terms change, lenders would presumably reverse the serviceability adjustments. But that doesn’t help investors who’ve already walked away from contracts or been forced into cheaper properties. They made decisions under uncertainty, and those decisions are now locked in.
The uncertainty discount
Buyer’s agents report that investor inquiry has dropped sharply since the budget, not just because of the borrowing power haircut but because of the uncertainty itself. When the rules are in flux, investors can’t model outcomes with confidence. They don’t know if the policy will pass as announced, be amended, or be repealed after a change of government. That uncertainty has a cost, it freezes decisions.
This is different from an interest rate rise. Rate rises are immediate and quantifiable. You can recalculate your serviceability, adjust your budget and move forward. Policy uncertainty doesn’t resolve until the legislation passes or fails, and during that window, many investors simply pause.
The flow-through effect shows up in rental supply. Investors who would have added properties to the rental pool this year are either sitting out or shifting to new builds (which remain eligible for negative gearing under the proposed rules). That reduces the rate at which new rental supply enters the market, even though the policy itself doesn’t restrict supply, it just changes the financial structure that makes acquiring that supply viable for marginal buyers.
Investors still active in the market have shifted their search criteria. Regional areas with lower price points and higher gross yields are seeing more interest because the properties can be structured as cashflow-positive without relying on tax offsets. Premium established stock in capital cities, where prices are high and gross yields are low, has become harder to justify on a pure cashflow basis.
If you’re under contract or planning to exchange
Check your pre-approval date and your lender’s policy update timeline. If your pre-approval was issued before the budget and you haven’t received formal loan approval yet, assume your borrowing capacity has been recalculated. Ask your broker for an updated serviceability assessment before you exchange on another property.
If you’ve already exchanged and your settlement date is still weeks away, confirm your formal approval in writing. Pre-approvals are not binding. If your lender recalculates and your capacity drops below your contract price, you’ll need to either inject more equity or renegotiate. Don’t assume the pre-approval number will hold through to settlement.
For new purchases, model the investment assuming zero negative gearing benefit, even if you’re buying before July 2027. That’s the serviceability test lenders are now applying. If the property doesn’t stack up on a cashflow-neutral or positive basis, you may not get the loan, or you’ll be borrowing less than you expected.
Rentvesting strategies that relied on leveraging negatively geared property to live elsewhere are failing the cashflow test in 2025. The borrowing power required to make that model work has shrunk, and the rental income needed to offset holding costs has risen. If you’re already in a rentvesting structure, review your serviceability buffer. If you’re planning to enter one, run the numbers assuming negative gearing doesn’t exist.
Scenarios over the next 12 months
Base case: The legislation passes in a form close to what was announced. Lenders keep the updated serviceability models in place. Investor activity stays suppressed until buyers either adjust their budgets downward or shift to new builds. Rental supply growth slows because fewer investors can justify purchasing established stock at current prices with reduced tax offsets.
Upside (for investors): The policy is amended or delayed, lenders reverse the serviceability changes, and borrowing power is restored. Investors who paused re-enter the market. This would compress the current window of reduced competition and potentially push prices higher as delayed demand returns.
Downside: The policy passes and a secondary effect emerges, vendors who were counting on investor buyers discover there’s less demand at their asking price. Listings rise, clearance rates fall, and prices soften in the investor-heavy segments (units, outer suburbs, regional areas with high yields). That would widen the gap between owner-occupier markets and investor markets, creating two distinct pricing dynamics within the same city.
The highest probability sits with the base case. The legislation has been announced, lenders have already adjusted, and reversing those changes would require either a policy backflip or a change of government. Investors should assume the new serviceability settings are permanent and plan accordingly.
One clear next step
If you’re holding a pre-approval issued before May 2025 and planning to use it within the next 90 days, get it revalidated now. Don’t wait until you’ve found a property and exchanged contracts. The recalculation risk is live, and discovering it mid-settlement is the most expensive time to find out your borrowing capacity has dropped. Subscribe to the newsletter for weekly updates as this policy moves through parliament and lenders adjust their models.
General info, not financial advice.
