OCR Rate Cuts & IRD Taxes: 7 Tips for Rental Property Owners

How do the Official Cash Rate (OCR) Cuts Impact Property Owners?

Interest rates are dropping fast.

While this offers cash flow relief, it also comes with important tax implications for rental property owners.

Here’s what working in your favor, what to watch out for, and how to plan ahead.

1. The Good: Lower Repayments Mean Better Cash Flow

With falling interest rates, your mortgage repayments are likely dropping, giving you extra breathing room. Use this cash flow relief wisely to strengthen your financial position.

2. The Good: Opportunity to Re-fix at Lower Rates

Since August 2024, we’ve seen four consecutive OCR cuts, bringing rates down from 5.5% to 3.7%. This trend creates opportunities for property owners to re-fix loans at lower rates.

3. The Bad: Fewer Tax Deductions on the Horizon

Lower interest rates may be good for your wallet, but they also reduce the amount of interest you can deduct on your tax return. Factor this into your tax planning to avoid surprises.

4. The Not So Bad: Interest Deductibility Still Limited

Despite falling rates, only 80% of interest is deductible this financial year ending 31 March 2025. This is still better than the 50% allowed the year prior. Full deductibility returns starting 1 April 2025, so make sure you plan factor this into your tax planning.

5. The Good: Consider Refinancing Sooner Rather Than Later

Refinancing at a lower rate may be a limited-time opportunity. Don’t wait too long to lock in low rates, especially if you expect further rate cuts to stop, slow of even reverse. Even economists and banks themselves struggle to predict interest rate movements – and often get it wrong.

Instead of trying to time the market, focus on what works best for your cash flow and financial situation. Personally, I’ve locked in a 3-year rate at 4.99% with Westpac.

6. The Good: Keep Your Repayments Steady

If possible, maintain your current repayment levels even as your interest rates drop. This allows you to pay off your mortgage faster, reducing the principal more quickly.

7. The Good: Plan Ahead for Year-End

Falling interest rates mean fewer deductible expenses, which can lead to higher taxable income. Make sure you’re prepared and consult with a tax professional to avoid unexpected liabilities.

– Baqir Hussain, FCCA

Director, Finex Chartered Certified Accountants