Mortgage lending hits new record high before Labor’s 5 per cent deposit scheme for first-homebuyers

Mortgage lending driven by strong investor demand was already hitting a record high before Labor fast-tracked its scheme allowing all first-homebuyers to get in with a 5 per cent mortgage deposit guaranteed by the taxpayer.

The value of investor and owner-occupier lending reached record levels in the year ended September 30, new Australian Prudential Regulation Authority data showed.

Demand for financing among property investors was particularly strong, soaring by 24 per cent over the year, compared with 16 per cent for owner-occupiers, with a new academic paper suggesting capital gain tax concessions were encouraging high-income earners to buy investment properties.

Investors made up 30.7 per cent of new loans during the September quarter.

The proportion of borrowers taking on risky debt levels that were at least six times their income also grew, from 5.6 per cent to 6.1 per cent of all new loans, when the September quarter of 2024 was compared with the September quarter of this year.

This all occurred before the Federal Government’s 5 per cent deposit scheme for first-homebuyers was brought forward to October 1, from January 1.

Lenders from February will also be required to limit loans, with debt-to-income ratios of six, to 20 per cent of all their mortgages.

Canstar data insights manager Sally Tindall suggested Australia’s housing market was likely to heat up next year, even if the Reserve Bank of Australia didn’t cut rates any further.

“Property prices are tipped to run hard again despite no further rate cuts,” she said. “APRA is clearly preparing for a busier, riskier market in 2026.”

Westpac on Friday responded to futures market expectations of two rate rises in 2026 by hiking its two-year fixed rate by 35 basis points to 5.59 per cent.

A dozen lenders have hiked at least one fixed rate in the past week, a Canstar analysis showed. This included Westpac, St.George, Bank of Melbourne, BankSA, ING, HSBC, Suncorp and Australian Mutual Bank.

Investor incentives

The 50 per cent capital gains tax discount is giving high-income earners an incentive to buy investment properties, former Reserve Bank of Australia economist Christian Gillitzer argued in a working paper published by the Australian National University’s Tax and Transfer Policy Institute.

“In this environment, higher marginal income tax rates sharpen the incentive to earn income in the form of capital gains rather than fully taxed ordinary income — particularly through rental property, which serves as collateral for generating debt-financed losses to shift income from the labour income tax base to the capital gains tax base.”

Since September 1999, property investors have only had to declare 50 per cent of their capital gain on their taxable income.

That means only $50,000 has to be added to their taxable income for a financial year if the investment property, owned for at least 12 months, went up in value by $100,000.

Dr Gillitzer, a senior lecturer with the University of Sydney, said the top marginal income tax rate of 45 per cent, for those earning more than $190,000, meant it made sense for high-income earners to find other ways to reduce their tax burden.

“Individual taxpayers adjust their demand for rental property in response to changes in marginal tax rates,” he said.

“Debt is used to generate tax losses and thereby shift income from the labour to capital gains tax base, providing new evidence on how leverage-based income shifting opportunities can shape rental investment behaviour and the composition of housing demand.”