2021 is nearly behind us, and what a year it’s been for the property market. Labour’s new laws were introduced in March (find out more about them here). And now, with October 1 behind us, the interest deductibility aspect of them has been put into play.

Those who own existing investment properties will see their ability to claim tax back on their mortgage interest wane over the next four years – until it’s removed entirely in 2025. Anyone who purchased an existing investment property on or after 27 March 2020 will feel these effects immediately, with interest deductibility denied to them as of 1 October this year.

And while this might seem like an attack on investor profit, it’s not without a (substantial) silver lining – new builds.

Interest deductibility and new builds

Interest deductibility is still available, in full, to those who invest in new builds. According to Finance Minister Grant Robertson, the purpose of tightening these tax rules is to shift investor attention away from existing residential properties and incentivise the construction of new houses.

Any property that received/receives its code of compliance certificate on or after 27 March 2020 is classed as ‘new’, and will maintain its exemption from the interest deductibility rules for the next twenty years – something that applies even if the property changes owners.

Out with the old, in with the new

This puts those who invest in new builds in a very advantageous position. As rentals, they’re set to deliver superior and consistent yields, making them attractive long-term assets. And because the bright-line test extension doesn’t apply to new builds either, they can be sold after five years without incurring high tax rates on profit.

Jarrod Kerr, Kiwibank’s chief economist, has noted a swift increase in mortgage rates over the last few months – a move echoed by other banks – and expects it to continue to rise. This makes offsetting the costs of mortgage interest a very timely and profitable perk.

And with all these factors in play, it’s not unreasonable to suggest that the demand for new builds will increase hugely, keeping prices buoyant.

New builds were already a sound investment before the interest deductibility rules – they’re generally better quality, sturdier, more comfortable, and boast all-round appeal. Now, they’re solid gold – and those who get in early and take advantage of this opportunity are likely to reap the benefits.