Westpac Flags Sharp Slowdown in Investor Home Loans After Tax Changes

Westpac Records 20% Drop in Mortgage Applications After Tax Changes

Westpac has reported a sharp drop in home loan demand, with average monthly mortgage applications falling 20% since the federal government announced changes to capital gains tax and negative gearing in May. The bank’s quarterly update on Monday showed that investor applications fell more steeply than owner-occupier ones, and first-home buyers are not filling the gap.

As a result, Westpac now expects growth in its investor loan book to more than halve—from 9.1% to 4.5%—over the next two financial years. Owner-occupier loan growth is also projected to ease, from 5.7% to 4.8%. The bank cited an “undersupply of housing” combined with population growth as a partial offset to the drag from higher interest rates and the tax changes.

Chief financial officer Nathan Goonan told analysts that the mortgage market is in “suspended animation” as borrowers wait for clarity on interest rates. With the RBA’s next cash rate decision pending, he noted that expectations have swung from two further rate rises to a potential cut, creating unusual uncertainty. First-home buyers made up 13.3% of Westpac’s mortgages, up about one percentage point since May, but this has not compensated for the retreat of investors.

The bank’s loan book is also showing signs of stress: owner-occupied loans slipped sharply to 61% of mortgages from nearly 67% in prior quarters, while interest-only lending spiked to 21.9%. The proportion of borrowers 30 days overdue on their mortgage ticked up marginally, though 90-day-plus arrears remained flat.

What the Loan Slowdown Signals for Westpac and the Housing Market

The Tax Effect Takes Hold

The 20% slump in mortgage applications closely tracks the timing of the May budget announcements on capital gains tax and negative gearing. While the market had anticipated some cooling, the speed and magnitude of the drop—particularly among investors—suggests the changes are altering borrowing behaviour faster than most banks forecast. Westpac’s sharp downward revision to loan growth indicates that the bank now sees a sustained, rather than transient, pullback in investor demand.

First-Home Buyers Fail to Fill the Gap

Westpac’s CFO confirmed that first-home buyer activity has not risen to offset the fall in investor applications. The modest one-percentage-point increase in their share of the book is insufficient to replace a significant shrinkage in investor loan growth. This challenges the policy assumption that curbing investor activity would quickly free up space for owner-occupiers, at least in the current high-rate environment.

Rate Uncertainty Freezes the Market

Goonan’s description of a market in “suspended animation” reflects a genuine shift in sentiment. When borrowers cannot anchor their expectations—first anticipating rate rises, then cuts—it discourages both buying and refinancing activity. With the RBA board meeting today, any signal about the future path of rates will directly affect how quickly the mortgage market normalises. For Westpac, persistent uncertainty could further compress volumes.

Shift to Interest-Only Reveals Strain

The jump in interest-only loans from 12–13% of the book to nearly 22% in one quarter is a notable red flag. It suggests that some existing borrowers are struggling with higher repayments and are seeking temporary cash-flow relief, or that new borrowers are gaming tighter serviceability rules. Combined with the slight uptick in 30-day arrears, it points to growing, albeit still contained, financial stress among Westpac’s home loan customers. The flat 90-day delinquency rate for now offers some comfort that this is not yet translating into serious defaults.

Key Implications for Westpac Shareholders and the Home Loan Sector

For Westpac shareholders

The volume-driven slowdown in mortgage income will weigh on revenue growth in the next two reporting periods. Watch the net interest margin in the full-year results (due in November) and any further deterioration in 30-day arrears, which could signal the need for higher provisioning costs.

For competitors and the sector

If Westpac’s experience is indicative, other major lenders—CBA, NAB and ANZ—will likely report similar trends in their upcoming updates. Banks that have relied heavily on investor loans for growth may face margin pressure and the need to pivot more aggressively to owner-occupier segments. Expect increased competition for prime owner-occupied borrowers, potentially compressing front-book discounts.

For the housing market and borrowers

The slowdown in investor credit could dampen price growth, especially in investor-heavy markets. The RBA’s rate decision today will be pivotal: a hold accompanied by dovish commentary might ease some of the current paralysis, while a hawkish surprise would prolong the freeze. Borrowers considering interest-only loans as a cash-flow fix should model the higher repayments that kick in when the interest-only period ends.