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Bankwest is set to rock the $1 trillion mortgage market and more than 1.5 million property investors by axing negative gearing benefits that drive lucrative residential property investment, particularly in Melbourne and Sydney.
The bank – owned by Commonwealth Bank of Australia, the nation's largest mortgage provider – will announce on Monday that generous tax breaks will not be allowed for calculating loan eligibility for new – and some existing – borrowers. Without negative gearing, the amount of loan a borrower can get will be lower.
Perth-based Bankwest's decision could lead to a shake-up in the nation's rental sector, trigger a scramble by competitors to poach disaffected customers and cause highly geared investment properties to flood the market.
Serviceability calculator amendment
The bank is expected to introduce the changes at 8pm (AEDT) by amending serviceability calculators used by mortgage brokers to assess loan eligibility. It will apply to all new loan applications and existing loans that require "reassessment" when banks review and adjust downwards pre-approved or issued loan balances.
CBA, which last week followed Bankwest's decision to pull property investor loans, is widely expected to replicate the decision.
"This potentially has huge implications for property investors and borrowers because of investors' tendency to rely on negative gearing," said Mark Chapman, a director of tax accountants H&R Block.
A confidential Bankwest memo said the changes were targeting borrowers that run investment properties at a loss.
"Where the income of the investment property does not exceed the costs, the related taxable benefit will no longer be included in BankWest's calculation for serviceability of the loan," it states.
That means it will lower borrowing capacity but not Australian Taxation Office deductions that can be made at the end of the tax year, such as council rates, owners' corporations and maintenance.
For example, a property investor paying the top tax rate of 49 per cent has a $1 million loan at 5 per cent interest, or about $50,000 a year.
The interest is tax deductible, so the real cost to the investor, after deducting tax of $24,500, is $25,500.
Headroom shrinking
"A taxpayer relying on negative gearing of $24,5000 to service the $50,000 interest bill will face an immediate financial burden," Mr Chapman said.
The Australian Financial Review last week revealed that Bankwest and CBA had indefinitely suspended finance applications for some investment home loans amid speculation they were close to breaching the Australian Prudential Regulation Authority's 10 per cent speed limit on mortgage loan growth.
Annualising the monthly net movements in investment loans during December shows CBA was growing at 10.3 per cent, according to analysis by Digital Finance Analytics. It is a raw number that includes a lot of assumptions but indicates CBA and Bankwest's regulatory headroom is rapidly shrinking.
New investment loans account for about 35 per cent of CBA and BankWest's combined lending book and 33 per cent of new mortgage lending. The banks do not identify how many investment loans are transferred from other lenders, which was the target of last week's ban announcement.
Other lenders, such as National Australia Bank, are writing to mortgage brokers advising them it still has an "appetite" for investor loans – which implies that CBA and Bankwest have lost theirs. Some leading lenders' loan books are believed to be growing at less than 5 per cent.
"But this mad scramble for market share is not how the regulators envisaged their 10 per cent limit was meant to work," said Mr Chapman.
Property investment increasing
Mario Borg, a finance strategist with Mario Borg Strategic Finance, said: "Negative gearing still assists investors at tax time as it includes all tax-deductible expenses. This will impact highly geared investors with low yielding properties where the interest on the borrowing exceeds the rental income."
About 1.5 million Australian households have an investment property and the number is rapidly increasing, particularly in Melbourne and Sydney.
"The impact of Bankwest's decision on new borrowers is not too bad – they can just borrow through another bank – but for existing borrowers, this change is effectively retrospective; they borrowed in good faith from this bank under one set of rules, now they are having another set of rules imposed on them," said Mr Chapman.
"These borrowers would probably not have taken a loan from BankWest in the first place if there had been any suggestion that this would happen."
CBA announces its half-year results on Wednesday.
Bankwest has confirmed the changes.
