Bankwest, the Perth-based subsidiary of Commonwealth Bank of Australia, announced on Monday that it was axing negative gearing benefits that drive lucrative residential property investments.

Moving forward, generous tax breaks will not be considered when calculating loan eligibility for new and some existing borrowers. Sans negative gearing, the loan amount a borrower can get will be lower.

Bankwest’s decision could potentially shake up Australia’s rental sector, trigger a scramble by competitors to poach disaffected customers from rivals, and cause highly geared investment properties to flood the market.

Bankwest has modified the serviceability calculators used by mortgage brokers to assess loan eligibility. The changes will apply to all new loan applications as well as existing loans that require reassessment when banks review and adjust downwards pre-approved or issued loan balances.

CBA is widely expected to replicate Bankwest’s changes.

“This potentially has huge implications for property investors and borrowers because of investors’ tendency to rely on negative gearing,” Mark Chapman, director of tax accountants at H&R Block Australia, told the Australian Financial Review.

A confidential Bankwest memo said the amendments target borrowers who run investment properties at a loss. “Where the income of the investment property does not exceed the costs, the related taxable benefit will no longer be included in BankWest's calculation for serviceability of the loan,” the memo said.

While this lowers borrowing capacity, it won’t have the same effect on ATO deductions that can be made at the end of the tax year, such as council rates, owners’ corporations, and maintenance.