Interest Deductibility - Assessing the Impacts on Property Investors

The National-led coalition government's recent changes to interest deductibility have sparked a range of reactions within New Zealand's residential property investor community. While many investors welcome the fast-tracked rollback as a source of relief, recognising its significant financial advantages, others are more cautious, noting that the benefits may not be evenly distributed across all investors.

Prior to 2021, investors in residential property were allowed to deduct their home loan interest from rental income to reduce their tax liabilities. However, a Labour-led policy in 2021 began the process of phasing out this deduction, resulting in investors being faced with higher tax bills, irrespective of whether they were making a profit.

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While the intention behind this policy change was to address concerns about housing affordability, its implementation had several unintended consequences. For instance, many small landlords as well as mum-and-dad investors found themselves grappling with increased tax liabilities, leading some to consider raising rents or exiting the market altogether.

This new tax policy, which comes into effect in April 2024, allows investors to deduct up to 80% of their home loan interest, with this number increasing to 100% by April 2025. This accelerated rollback aims to reduce the financial burden on landlords and renters and could offer a potential lifeline to newer and younger investors. This policy shift has been met with enthusiasm from many home loan experts who see the potential benefits. However, the benefits will vary among investors with some standing to benefit more from the changes than others.

Overall, property investors will make more money. But the degree of this advantage is determined by a range of factors including the timing and nature of the investment. Investors who have purchased property after 2021 without any deductibility can expect to see a significant boost in tax benefits straight away. For those who had previously purchased property before 2021 with a 50% deductibility, this percentage rise to 80% will result in a smaller yet still notable difference. Meanwhile, individuals who had recently purchased new builds with existing interest deductibility rules will experience little to no changes. Previously this ‘special status’ only lasted for 20 years. Under the new regulations, it will continue forever so there is a long-term benefit here.

Despite divided opinions, the return of interest deductibility is a positive step forward. However, its true impact on rental prices remains uncertain. The new interest deductibility rules could attract more investors into the property market, resulting in increased rental properties and greater options for renters. Yet, in the current market, high home loan interest rates and entry costs still make it challenging for many to enter the property market.

The latest results from the Investor Insight Survey via Tony Alexander and Crocker’s Property Management show existing investors’ intentions to purchase have weakened, despite reduced concerns regarding interest rates and the removal of unfavourable tax regulations. Moreover, worries about property prices declining have increased, while apprehensions about council rates, insurance premiums, and maintenance expenses remain high.

Additionally, among investors considering buying, interest in acquiring new properties or pursuing self-development projects continues to decline. These trends will also have clear implications for building companies.

Are you considering property investment? Reach out to the Rapson Team today to explore how we can support your goals and navigate these changes together.