A smarter alternative to interest deductibility restrictions for landlords
Wednesday, 11 March 2026
A balanced approach to rental policy: linking interest deductibility to long-term tenancies
New Zealand’s rental market has rarely been short of policy debate. Few changes, however, have generated as much discussion as the previous government’s decision to remove interest deductibility for residential landlords. Introduced in 2021, the policy prevented landlords from deducting mortgage interest as a business expense. Even Inland Revenue acknowledged the change represented a significant shift away from standard taxation principles applied to most other businesses.
The policy was designed with a clear objective in mind. By limiting the tax treatment available to investors, the government hoped to dampen speculative demand and reduce pressure on house prices.
In practice, the results were far more complex.
For many landlords, the removal of interest deductibility coincided with rising mortgage interest rates. At the same time borrowing costs were climbing, the ability to deduct those costs from rental income was steadily being phased out. The interest limitation rules gradually reduced deductibility between October 2021 and March 2025, placing increasing financial pressure on property investors.
These two forces - higher borrowing costs and declining tax deductibility - significantly affected the economics of rental ownership.
The unintended consequences for landlords and tenants
When the cost of holding a rental property rises sharply, the effects are felt across the housing system.
Some landlords chose to exit the market altogether, reducing rental supply. Others were forced to increase rents to offset higher costs. At the same time, prospective investors reconsidered entering the market given the less favourable tax treatment.
The outcome was a tightening of rental supply in many areas and upward pressure on rents.
With the change of government, the policy direction shifted once again. Interest deductibility began to be restored, with landlords able to claim 80 percent of interest costs from April 2024 and full deductibility returning from April 2025.
Early signals across many regional markets suggest this change has helped stabilise the rental environment. In some areas, rental listings have increased as more landlords remain in the market or re-enter it. Combined with easing interest rates, the return of interest deductibility has contributed to a more balanced supply picture.
While rental trends vary regionally, the broader observation across many markets is that rental inflation has slowed and in some cases rents have softened slightly as supply improves.
Why interest deductibility will remain a political issue
Despite the recent policy reversal, interest deductibility is unlikely to disappear from the political debate anytime soon.
With the 2026 general election approaching, there is increasing discussion about whether the policy could once again become part of the political landscape. Previous arguments in favour of the restriction centred on concerns that investors were contributing to speculative pressure in the housing market.
But the experience of the past few years has highlighted the difficulty of applying a blunt policy tool across an entire sector that includes a wide range of investors - from long-term housing providers to short-term speculators.
Treating all landlords the same does not necessarily lead to the best outcomes for tenants or for the stability of the rental market.
A more effective approach may be one that focuses on behaviour rather than ownership.
A policy compromise that could benefit both tenants and landlords
Instead of broadly restricting interest deductibility for all landlords, a more balanced policy could reward long-term rental providers while discouraging speculative behaviour.
One possible framework already exists within New Zealand’s Build-to-Rent (BTR) model.
Build-to-Rent developments were exempt from the interest limitation rules, recognising that these projects are designed specifically to deliver stable, long-term rental housing rather than short-term capital gains.
Under section 58A of the Residential Tenancies Act, tenants who enter a 10-year fixed-term Build-to-Rent tenancy can still terminate their agreement with 56 days’ notice. This provides security without trapping tenants in long contracts.
The model offers an important balance between tenant protection and investment certainty.
Extending the Build-to-Rent concept to the wider market
This concept could potentially be applied more broadly across the private rental market.
Rather than denying interest deductibility to all landlords, policymakers could allow landlords to claim interest deductions only if they commit to offering tenants a long-term tenancy option – for example, a 10-year agreement similar to the Build-to-Rent structure.
Tenants would retain the same flexibility to exit with 56 days’ notice.
Such a policy could deliver several benefits simultaneously.
Tenants would gain greater security and stability in their housing arrangements. Landlords who view rental property as a long-term investment would continue to receive standard business tax treatment. Meanwhile, speculative investors - who rely on flexibility to buy and sell quickly - would likely opt out of the system.
In effect, the policy would encourage long-term housing supply while discouraging short-term speculation.
Encouraging a more stable rental market
New Zealand’s rental market has experienced significant policy volatility over the past decade. Frequent regulatory shifts can create uncertainty for both landlords and tenants, ultimately discouraging long-term investment in rental housing.
A policy approach that links interest deductibility to tenant security could help stabilise the system.
It would move the conversation away from broad restrictions and towards behaviour-based incentives that reward responsible investment.
Long-term investors would be encouraged to provide stable housing, tenants would gain greater certainty, and speculative activity could be reduced without undermining the overall rental supply.
Looking ahead
Housing policy will always involve balancing competing priorities – affordability, supply, investor participation, and tenant protection.
The experience of the interest deductibility debate has shown that blunt policy instruments can sometimes produce unintended consequences.
A more nuanced approach that rewards long-term commitment to the rental market may offer a smarter path forward.
By linking interest deductibility to long-term tenancy options, policymakers could create a framework that supports tenant security, sustains landlord participation, discourages speculation, and ultimately strengthens the resilience of New Zealand’s rental housing market.
Looking for your next rental home? Browse available properties.
Browse
Topic
Related news
