Mortgage Interest Deductibility Restored - What It Means for Canterbury Investors
The National government has fully reversed Labour's 2021 interest deductibility restriction for residential property investors. The final change - from 80% back to 100% deductibility - took effect from 1 April 2025. This is the most significant positive tax change for Canterbury property investors in several years.
What Changed and When
In 2021, the Labour government removed the ability for residential property investors to deduct mortgage interest as an expense against rental income. This significantly increased the taxable profit for negatively geared investors, increasing their tax bills substantially. The National government reversed this change in two stages: from 1 April 2024, investors could claim 80% of mortgage interest as a deduction; from 1 April 2025, investors can claim 100% of mortgage interest. This applies to all residential rental properties regardless of when they were purchased or when the loan was drawn down. The 2026 tax return will no longer ask for interest limitation details, making compliance more straightforward.
How Much Is It Worth
ANZ's analysis provides a clear worked example. For an investment property with a 5.29% mortgage rate at the 33% income tax rate, the change from 80% to 100% deductibility saves an additional approximately $2,092 per year in the tax year ending 31 March 2026 - approximately $40 per week. For a higher-value property at a $1 million mortgage, the tax saving from full deductibility is proportionally larger - potentially $4,000-$6,000 per year depending on the mortgage rate and the investor's marginal tax rate. For an investor with an $800,000 mortgage paying 5% interest, the full deductibility of the $40,000 annual interest cost saves approximately $13,200 per year in tax at a 33% marginal tax rate.
What It Means for Canterbury Investors Specifically
The restoration of interest deductibility directly improves cashflow for all Canterbury investment properties. It narrows the gap between rental income and mortgage costs for negatively geared properties, and improves the surplus for positively geared ones. Investor activity in Canterbury roughly doubled between early 2025 and early 2026, and the interest deductibility restoration is one of the three primary factors behind this recovery alongside lower mortgage rates and eased LVR rules. For investors who were holding properties through the deductibility restriction period and experiencing worse-than-expected cashflow, the restoration should prompt a review of your numbers to understand the actual current position of your portfolio.
What Has Not Changed
The interest deductibility applies to mortgage interest only - not capital repayments. Operating costs (management fees, insurance, rates, repairs) remain deductible as before. Capital improvements remain non-deductible as regular expenses. Rental losses remain ring-fenced - they can only be offset against other rental income, not against salary or wages. The bright line test (now 2 years for properties sold from 1 July 2024) still applies.
Data from Opes Partners (interest deductibility guide), ANZ (tax changes explainer), Baker Tilly Staples Rodway, and IRD. For general information only - not tax or financial advice. Always consult a qualified tax accountant for advice specific to your situation.