The RBA lifted the cash rate to 4.10% at its March 2026 meeting. Investor mortgage rates are currently sitting at roughly 6.4 to 6.7%, depending on lender and loan-to-value ratio. The lower end of that range comes from RBA Statistical Table F6 (Housing Lending Rates), which recorded investor interest-only outstanding balances at 6.4% as at February 2026 (series FLRHIOI). The upper end reflects higher-LVR and non-discounted variable products, consistent with the securitised investor interest-only variable rate in RBA Statistical Table F5 (Indicator Lending Rates) at 6.49% as at March 2026 (series FILRSAVIIO).
If you own — or are considering buying — an investment property, those rates have a direct effect on your cash flow. And if property prices are also falling, a separate effect hits your equity position at the same time. The two do not cancel each other out. This article walks through what both effects actually look like in dollar terms.
How negative gearing works
When your rental income is less than your deductible rental expenses, the net loss can be deducted from your other income — your salary, for instance — under section 8-1 of the Income Tax Assessment Act 1997. Deductible expenses include mortgage interest, depreciation, property management fees, council rates, insurance, and genuine repair costs (not improvements, which are capital and treated differently).
The practical result is a tax refund. The ATO, in effect, shares part of your holding cost.
How much it shares depends on your marginal tax rate. At a 39% effective marginal rate — which applies to income in the $120,001 to $180,000 band under the ATO Individual Income Tax Rates for 2025-26, including the 2% Medicare levy — a $10,000 net rental loss reduces your tax bill by $3,900.
That means you cover 61 cents in every dollar of the loss yourself. The ATO covers 39 cents.
The strategy has historically made sense when property was growing in value: you pay the ongoing shortfall, the ATO subsidises part of it, and the capital growth more than covers the rest. When you eventually sell, assets held for more than 12 months attract a 50% CGT discount under Division 115 of the ITAA 1997, which halves the taxable portion of any gain.
That equation depends on two things holding up: the cash drag stays manageable, and prices keep rising. At a 4.10% cash rate with 6.5% mortgage rates, the first condition is under real pressure. In a correction, the second assumption breaks.
The numbers on a real example
Here are the inputs for the worked example below and where they come from. Property value: $900,000 (representative Melbourne established dwelling). Mortgage: $700,000 interest-only, giving an LVR of approximately 78%. Mortgage rate: 6.5%, the midpoint of the 6.4–6.7% range from RBA Statistical Tables F5 and F6. Weekly rent: $480, consistent with Melbourne median asking rents for established dwellings. Vacancy allowance: four weeks per year. Non-interest holding costs: approximately $5,500 per year as itemised below. Marginal tax rate: 39%, being 37% plus the 2% Medicare levy applicable to taxable income in the $120,001 to $180,000 band under the ATO Individual Income Tax Rates schedule for 2025-26 (ato.gov.au).
Take a $900,000 investment property with a $700,000 interest-only mortgage at 6.5%. The annual interest cost is $45,500 ($700,000 × 6.5%).
Rental income: $480 a week, with four weeks vacancy per year. That gives 48 occupied weeks, or about $25,000 in gross annual rent ($480 × 52 = $24,960, rounded).
Other holding costs — council rates, water, building and landlord insurance, property management (typically 7–9% of rent plus letting fees), and a repairs allowance — come to approximately $5,500 per year for a standard established dwelling.
Annual rent: $25,000. Annual non-interest expenses: $5,500. Annual interest cost: $45,500. Net cash loss before tax: approximately $26,000.
At a 39% marginal rate, the ATO refund on that loss is $10,140 ($26,000 × 39%). Your after-tax cash drain is approximately $15,860 per year — or $1,322 per month — just to hold the property.
That is the baseline cost before anything else changes. The RBA's Statement of Monetary Policy (February 2026) noted that investor housing credit growth has remained positive but that servicing burdens have risen sharply for borrowers who purchased after 2021.
What happens when prices fall
Your starting equity position with a $700,000 mortgage on a $900,000 property is $200,000, at an LVR of approximately 78%.
A 10% price fall. The property is now worth $810,000. The mortgage is still $700,000 — an interest-only loan does not pay down principal. Your equity falls from $200,000 to $110,000, a 45% reduction in equity from a 10% fall in price. Your LVR moves from 78% to 86%.
Your after-tax cash drain of $15,860 per year is unchanged. The rental income, the expenses, and the tax rate are the same as before. Only the price line moved — and that movement sits entirely in your equity.
An LVR of 86% is approaching the threshold many lenders apply when you try to refinance. The ABS Lending Indicators series shows that investor refinancing activity has been elevated since 2022 as fixed-rate loans roll onto higher variable rates. If you need to refinance at that LVR, you may face higher rates, lender's mortgage insurance, or a requirement to put in additional equity.
A 20% price fall. The property is now worth $720,000. Mortgage still $700,000. Equity falls from $200,000 to $20,000 — a 90% reduction in equity from a 20% fall in price. LVR is approximately 97%.
At 97% LVR, standard refinancing is not available. Lender's mortgage insurance starts from 80% LVR with most lenders, and rates above 90% LVR are either materially higher or simply not offered in the investor loan market. You continue paying $15,860 per year against an asset that has almost no net equity behind it.
If you were forced to sell at $720,000, with a $700,000 mortgage plus legal and selling costs, you would most likely crystallise a capital loss. Under the ATO's rules, that capital loss can only be offset against capital gains — not against your ordinary income. If you have no other assets with embedded gains, the capital loss is carried forward indefinitely.
Why the tax benefit does not help here
Negative gearing works only on the income side of your tax position. Each year, the rental loss reduces your taxable income and produces a refund. That is the full extent of what the mechanism does.
It does not affect:
- The outstanding balance on your mortgage.
- The market value of the property.
- Your equity position or your LVR.
- The capital loss that crystallises if you sell at a loss.
A capital loss only generates a tax benefit when you realise it by selling, and only if you have capital gains to offset it against. In the 10% correction scenario, you have a paper loss of $90,000 that is not yet a tax event. To access any tax benefit from it, you have to sell — and then the benefit only applies if you have gains elsewhere.
The 50% CGT discount under Division 115 that makes negative gearing attractive at exit — by cutting the taxable portion of a long-term gain in half — has no application when you are selling at a loss. There is no discount on a loss. It carries forward as a capital loss, potentially for years.
The asymmetry
At low interest rates and rising prices, the strategy worked in two directions: the cash drain was modest, and capital growth covered the gap comfortably. The tax offset was a modest top-up on a position that was already producing returns.
At current rates and in a correction, both directions invert. The cash drain on the example above is real and recurring at $15,860 per year. Prices are not rising to absorb it. The tax offset exists — it is not trivial — but it does not reduce the drain to zero, and it provides no buffer on the balance-sheet side at all.
The RBA's Financial Stability Review (March 2026) noted that investors who purchased in the 2021–2022 period at elevated prices and then rolled onto higher variable rates have tighter serviceability margins than earlier cohorts. Mortgage arrears for investor loans, while still low in absolute terms, have risen from a very low base, and the stress is concentrated in higher-LVR, higher-rate positions. The FSR described this as a structural vulnerability for investors in a scenario where dwelling prices fall further — not a prediction, but a description of the position.
For investors who entered at lower prices and lower LVRs, the same arithmetic applies, but from a more comfortable equity base. A 20% fall from a $900,000 purchase with a 40% deposit is a very different position than a 20% fall from a purchase that started with a 20% deposit.
What this means for someone entering now
At current rates, the gross rent required to cover all costs on the example property — interest plus non-interest holding costs — is approximately $51,000 per year, or approximately $980 per week. The property rents at $480 per week. The ATO refund fills part of the gap, but you fund 61% of the shortfall every year.
For a new buyer, the question is whether expected capital growth will exceed the after-tax holding cost over your investment horizon. That assessment changed materially when the cash rate moved from 0.1% to 4.10%.
For an existing investor, the more pressing question is concentration: how much of your household wealth sits in leveraged investment property, and what does your equity position look like at current market values? An investor whose primary residence and investment properties together represent 90% of household wealth — all leveraged — has a materially different risk profile to one whose investment property represents 20% of a diversified balance sheet.
This is a description of how the tax rule operates given current rates. It is not personal tax advice. Australian tax outcomes depend on individual marginal rate, holding structure, depreciation schedule, prior CGT history, and small-business or retirement concessions. Consult a registered tax agent before acting on any of the above.
Published by Claire Ashworth. Every fact traces to a primary source.