The federal government's tax reform package has reshaped the way property investors structure their portfolios and finance.
If you are weighing up an investment property in Hawthorn, the decisions you make now about timing, property selection and loan structure will determine whether you can claim losses against your income, which capital gains tax rules apply, and how lenders assess your borrowing capacity under the debt-to-income caps introduced in February.
How Negative Gearing Rules Changed in 2026
Negative gearing for residential investment properties purchased after 7:30pm on 12 May 2026 has been quarantined. Losses from those properties can only offset other residential rental income or be carried forward, not offset against salary or wages. The change takes effect from 1 July 2027.
Properties held before that time continue under the old rules. If you purchased a Victorian terrace in Hawthorn before 12 May 2026, or had a contract in place at that time, you retain the ability to offset rental losses against your employment income indefinitely. Properties acquired between 12 May 2026 and 30 June 2027 can be negatively geared under the old rules until 30 June 2027 only.
Eligible new builds remain exempt. A new dwelling constructed on previously vacant land, or a development that increases the number of dwellings on a site, can still be negatively geared by the first investor under the existing rules. A knock-down rebuild that does not add dwellings does not qualify.
Consider a buyer who contracted to purchase an established two-bedroom apartment in Hawthorn East on 10 May 2026. That property remains fully eligible for negative gearing. A second buyer contracting on 15 May for a similar apartment will have losses quarantined from 1 July 2027 onward, but can claim them against other rental income or carry them forward to offset a future capital gain on any residential property.
Capital Gains Tax Reform and What It Means for Investors
From 1 July 2027, the 50 per cent capital gains discount is replaced with cost base indexation and a minimum 30 per cent tax rate on real gains for properties acquired after that negative gearing announcement date. Gains accrued before 1 July 2027 on assets already held remain under the current discount rules.
If you hold an investment property in Hawthorn for ten years and sell it, the portion of the gain attributable to the period before 1 July 2027 is taxed under the 50 per cent discount method, and the portion after is indexed and taxed at the minimum rate. Eligible new builds retain an election between the discount and the new indexation method.
This creates a valuation requirement at 30 June 2027 for every residential investment property held at that date. The market value at that point becomes the reference for calculating the split. For Hawthorn properties, where values have historically appreciated in line with the broader Boroondara market, the tax difference over a long hold period can be substantial.
Debt-to-Income Caps and How Lenders Apply Them
From 1 February 2026, lenders can approve no more than 20 per cent of new investor loans at a debt-to-income ratio of six times or higher. The cap is applied separately to investor and owner-occupier portfolios, and measured quarterly for major banks and on a rolling four-quarter basis for smaller lenders.
Debt-to-income is calculated as total debt divided by gross income. A couple earning a combined $180,000 with $900,000 in investment debt and a $600,000 owner-occupied loan has a DTI of 8.3. If they apply for an additional investment loan, most lenders will decline unless the existing debt is reduced or income increases.
The cap does not apply to finance for new construction, newly erected dwellings as defined in the Australian Accounting Standards, or bridging finance for owner-occupiers. A Hawthorn investor purchasing a townhouse in a newly completed development may be exempt from the DTI cap, whereas the same investor purchasing an established townhouse in Glenferrie Road would be subject to it.
Lenders still assess every application on serviceability using a buffer of three percentage points above the product rate. The DTI cap is an additional constraint, not a replacement. If your income can service the loan under the buffer test but your DTI exceeds six, the application may still be declined if the lender has reached its 20 per cent limit for that quarter.
Structuring Loans for Grandfathered Properties Versus New Purchases
If you already own investment property in Hawthorn and are considering releasing equity to fund a second purchase, the loan structure depends on the acquisition date of the new property.
For a property acquired before 12 May 2026, interest on any borrowing used to acquire or hold that property remains fully deductible against all income. You can refinance that loan, increase the amount to fund renovations or holding costs, or split it between variable and fixed components without affecting deductibility, provided the borrowed funds are used for income-producing purposes.
For a property acquired after 12 May 2026, interest remains deductible, but any net rental loss is quarantined from 1 July 2027. The loan structure should prioritise flexibility and cash flow. Interest-only terms reduce the monthly commitment, but principal and interest may be preferable if you expect the property to become cash-flow positive within a few years and want to build equity steadily.
If you are purchasing a second investment property using equity from a grandfathered Hawthorn property, ensure the new loan is documented separately. Lenders and the ATO treat each security independently. Mixing funds across multiple properties in a single loan account can complicate deductibility claims and limit your ability to sell one property without triggering a full discharge.
Investor Deposit Requirements and Lenders Mortgage Insurance
Most lenders require a minimum 10 per cent deposit for investment property, though some will lend at 90 per cent loan-to-value with Lenders Mortgage Insurance. At 80 per cent LVR or below, LMI is typically not charged. Above that threshold, the premium increases sharply.
For a Hawthorn apartment purchased at the current median, a 10 per cent deposit means genuine savings in the range required by most lenders, plus settlement costs including stamp duty and legal fees. Stamp duty for investment property in Victoria does not attract the concessions available to first home buyers or owner-occupiers, and is calculated on the full purchase price.
If you are releasing equity from an existing property rather than using cash savings, the deposit is sourced from a refinance or top-up of the first loan. Lenders assess the combined exposure across both securities. The debt-to-income cap applies to the total debt, not individual loans.
Some lenders offer rate discounts for larger deposits. A borrower with a 30 per cent deposit may access a lower rate than one borrowing at 80 per cent LVR, even with the same income and credit profile. The difference in rate can exceed 20 basis points, which over the life of a loan compounds significantly.
Vacancy Rates and Rental Income in Hawthorn
Hawthorn sits within the City of Boroondara, which has historically recorded lower vacancy rates than metropolitan Melbourne as a whole. The suburb attracts long-term tenants, including professionals working in the CBD and families seeking access to the local school zones.
Lenders typically assess rental income at 80 per cent of the market rent to account for vacancy and maintenance periods. If a two-bedroom apartment in Hawthorn rents for $650 per week, the lender will use $520 per week in serviceability calculations. That assumed income is then tested against the loan repayment calculated at the product rate plus the three percentage point buffer.
A low vacancy rate improves cash flow but does not change how lenders assess the application. The 80 per cent shading is a standard prudential measure and applies regardless of local market conditions. Investors who assume they can rely on full rental income year-round often find the gap between actual rent and serviceability assumptions creates a monthly shortfall that must be funded from other income.
Foreign Investment Restrictions and How They Affect Established Properties
Foreign persons, including temporary residents, are prohibited from purchasing established dwellings in Australia until 30 June 2029. The ban was extended in the 2026-27 Federal Budget from the original end date. It does not apply to new dwellings or developments that increase housing supply.
For Hawthorn, the restriction has removed a segment of demand from the established apartment and townhouse market. Investors who previously competed with offshore buyers for stock near Glenferrie or Camberwell Junction now face a smaller pool of competing bidders, though that effect varies by property type and price point.
The ban does not affect Australian citizens, permanent residents, or New Zealand citizens. Temporary residents who held approval and a purchase contract before 1 April 2025 are grandfathered. All other foreign investment in residential property must qualify under one of the narrow exceptions, including certain Pacific labour mobility participants and employee accommodation provided by foreign employers.
Application fees for established dwelling exceptions were tripled from 1 April 2025, and vacancy fees doubled. The combination of higher fees and tighter eligibility has reduced foreign approvals for established stock across metropolitan Melbourne.
Tax Deductions Beyond Interest and How to Maximise Them
Interest is the largest claimable expense for most property investors, but not the only one. Costs directly related to earning rental income are deductible in the year incurred. These include body corporate fees, council rates, water charges, landlord insurance, property management fees, repairs and maintenance, and depreciation on fixtures and fittings.
Depreciation is calculated using the effective life of assets and is claimed annually even though no cash is spent. A quantity surveyor prepares a depreciation schedule that itemises claimable amounts for the building and fixtures. The schedule is a one-off cost and can be used across multiple tax returns until the asset is sold or fully depreciated.
For properties acquired after 12 May 2026 and subject to quarantining from 1 July 2027, these deductions reduce the rental loss that is carried forward or offset against other rental income. They do not reduce salary or wages. The distinction matters when structuring a portfolio that includes both grandfathered and newly acquired properties.
Investors often overlook the deductibility of loan establishment fees, valuation costs, and borrowing expenses. These can be claimed over five years or the term of the loan, whichever is shorter. If you refinance within that period, any unclaimed balance is deductible in the year of refinance.
When to Fix Your Investment Loan Rate
Fixed terms for investment loans typically range from one to five years. The decision to fix depends on your view of future rate movements, cash flow tolerance, and the flexibility you need during the fixed period.
A fixed term locks in repayments and provides certainty, but most fixed products do not permit additional repayments beyond a modest annual threshold without incurring break costs. If you plan to make lump sum repayments from bonuses, rental surpluses, or asset sales, a variable loan or a partial fix may be more suitable.
Some investors split their loan, fixing a portion and leaving the remainder on a variable rate. A 50-50 split provides partial rate protection while retaining access to offset accounts and extra repayment features on the variable portion. The split ratio can be adjusted at each refinance or fixed term expiry.
Fixed rates for investment loans are typically higher than equivalent owner-occupier fixed rates, though the margin varies by lender. The difference reflects higher regulatory capital requirements for investor lending and the higher arrears rates observed in downturns.
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Frequently Asked Questions
Can I still negatively gear an investment property purchased in Hawthorn after May 2026?
Interest remains deductible, but net rental losses from properties acquired after 7:30pm on 12 May 2026 are quarantined from 1 July 2027. Those losses can only offset other residential rental income or be carried forward, not offset against salary or wages.
How does the debt-to-income cap affect my ability to borrow for investment property?
From 1 February 2026, lenders can approve no more than 20 per cent of new investor loans at a DTI of six times or higher. If your total debt exceeds six times your gross income, approval depends on whether the lender has capacity under its quarterly limit.
What deposit do I need for an investment property in Hawthorn?
Most lenders require a minimum 10 per cent deposit, though some will lend at 90 per cent LVR with Lenders Mortgage Insurance. At 80 per cent LVR or below, LMI is typically not charged.
Do the new capital gains tax rules apply to properties I already own?
No. Gains accrued before 1 July 2027 on existing assets remain under the current 50 per cent discount method. The new indexation and minimum tax rate apply only to gains accruing after that date.
Are foreign buyers still able to purchase established apartments in Hawthorn?
No. Foreign persons are prohibited from purchasing established dwellings until 30 June 2029, with narrow exceptions. The ban does not apply to Australian citizens, permanent residents, or New Zealand citizens.
