Do lenders factor negative gearing into serviceability?

Negative gearing affects an investor real cash flow through its tax treatment, and lenders differ in whether they reflect that in serviceability. This is a tax matter as much as a lending one, so here is a general explanation of how lenders tend to approach it. It is not tax advice.

What negative gearing means

A property is negatively geared when the costs of holding it, including loan interest, exceed the rental income, producing a loss. Under current tax rules that loss can generally be offset against other income, which can reduce the investor tax. The result is that the after tax cost of holding the property is lower than the raw cash shortfall suggests.

Why it can matter for serviceability

Because the tax benefit improves the investor overall cash position, some lenders take it into account when assessing serviceability, effectively recognising that the property costs less to hold after tax. Where a lender does this, it can improve borrowing capacity compared with assessing the property on a pre tax basis.

Treatment varies by lender

Not all lenders treat negative gearing the same way. Some build the tax effect into their serviceability calculation, while others take a more conservative approach and do not. So the same investment can be assessed differently at different lenders, which is why the choice of lender can matter for investors.

It depends on your tax position

The value of negative gearing depends on your personal tax situation, including your marginal tax rate and your other income. Because it is specific to you, the actual benefit is something your accountant or tax adviser should confirm, rather than a figure that can be generalised.

Tax rules can change

Negative gearing is a feature of current tax rules, and tax policy is subject to change over time. Any strategy that relies on the tax treatment should be considered with that in mind, and with current advice, rather than assuming the rules will always stay the same.

Do not let tax drive the whole decision

A tax benefit is only one part of an investment, and a property should generally stack up on its fundamentals, not solely on the tax saving. Lenders, sensibly, still assess your overall capacity to service the debt at a buffered rate, regardless of the tax position.

Get the right advice and lender

Because this sits at the intersection of tax and lending, the useful step is to have your accountant confirm the tax position and a broker find a lender whose serviceability treatment suits you. A broker who works with investors can do the latter, usually at no cost to you. This is general information, not tax or financial advice.