Changes for property investors in the Government’s new housing policy

New rules for property investors will take effect from 27 March 2021 as part of the Government’s shake-up of housing policy. The changes are designed to tilt the balance back in favour of first home buyers and to discourage property speculation.

Interest deductibility

From 1 October 2021, any investor who settles on a residential property after 27 March 2021 will no longer be able to deduct interest paid on the mortgage from the rental income. This means that property investors will face increased tax bills from October onwards. For properties acquired before 27 March 2021, there will be a gradual reduction in the amount of interest that can be offset against rental income. From 1 October 2021, investors will only be able to deduct 75% of interest costs, reducing to 50% from 1 April 2023, 25% from 1 April 2024, and finally resulting in no interest deductions by 2025. The Government has not yet decided whether new builds will be exempt from this policy.

Bright-line test

From 1 October 2015, any property that was sold within two years of purchase was subject to tax on the value of the increase between the purchase price and the sale price, unless the property was owner-occupied. This is called the bright-line test. From 29 March 2018, this applied to any non-owner-occupied home sold within five years of purchase. The Government is increasing this to ten years from 27 March 2021. This means that property investors will have to pay tax on the value of any increase at their marginal tax rate, which could be up to 39% from 1 April 2021. However, the five-year rule will stay in place for any new builds, consistent with the Government’s desire to increase housing stock in New Zealand.

The Government has also announced that it will put $3.8 billion into a Housing Acceleration Fund which will fund infrastructure investment, such as roads and pipes, to housing developments to remove hold-ups for new developments.

Loan-cap ratios

The Government has increased the First Home Loan and Grant scheme caps, allowing first home buyers to receive grants for more expensive houses, while also increasing the income caps to make the scheme available to more people. First home buyers only need a 5% deposit to be eligible for the scheme, whereas investors will have to meet a 40% Loan-to-Value ratio before purchasing property from 1 May 2021. There has also been speculation that the Government or the Reserve Bank may change the rules so that investors can no longer use equity to fund a deposit on a property.

The Government is hoping that the changes will increase housing affordability amid growing unease at the rapid increase in house prices over the last year. These changes will significantly impact property investors, even with interest rates at historically low levels, and may cause some to rethink their long-term investment strategies.