Why Positive Gearing Should Guide Your Investment Loan

What Makes an Investment Loan Positively Geared

A positively geared investment loan occurs when your rental income exceeds all property expenses including loan repayments, council rates, insurance, property management fees and other holding costs. The surplus is added to your taxable income, but your loan serviceability improves because the property contributes to your ability to service debt rather than drawing from it.

Consider a buyer who purchases a two-bedroom unit near Hampton Street with rental income of $650 per week. At current variable rates, a loan amount of $450,000 on a principal and interest repayment schedule costs roughly $3,100 per month. Add $400 per month for body corporate, insurance and rates, and the total holding cost sits around $3,500 monthly. The rental income delivers $2,817 per month, creating a shortfall. To achieve positive gearing, the same buyer would need to reduce the loan amount to around $300,000, increase the deposit, or target a property with higher yield.

Hampton's median price point typically requires either a substantial deposit or dual income to achieve positive cash flow from day one. Investors who prioritise positive gearing often look to neighbouring areas with lower entry prices or accept smaller, higher-yield properties within the suburb.

How Positive Gearing Affects Borrowing Capacity

Lenders assess your ability to service an investment loan by applying a serviceability buffer of at least 3 percentage points above the loan product rate and calculating net rental income at 80 per cent of the actual rent to account for vacancy and management costs. When a property is positively geared, the net rental income strengthens your serviceability, allowing you to borrow more or qualify for an additional loan without increasing your own income.

In our experience, buyers who structure their first investment property to be positively geared find it easier to expand into a second or third property. The rental surplus offsets some of the debt load when the lender calculates your debt-to-income ratio. From 1 February 2026, lenders are restricted to writing no more than 20 per cent of new investor loans at a DTI of 6 times or greater, so the income contribution from a positively geared property can be the difference between approval and refusal.

If you are planning to expand your property portfolio, positive gearing on your first purchase gives you room to absorb a negatively geared second property later without breaching serviceability limits.

Interest Only vs Principal and Interest on a Positive Geared Loan

Interest only repayments reduce your monthly outgoings and may turn a neutrally geared property into a positively geared one, but they also increase the risk weight applied by the lender under APRA's capital framework and may attract a rate premium. Offset account balances do not reduce the loan amount for LVR purposes, so an interest only loan at 85 per cent LVR remains at that level even if you hold cash in offset.

For a positively geared investment, principal and interest repayments offer a lower interest rate, build equity automatically and avoid the refinance requirement that arises when an interest only period expires. The monthly cost is higher, but the total interest paid over the life of the loan is lower, and you retain more flexibility if you wish to release equity later for a second purchase.

Investors who choose interest only for positive gearing should confirm the interest only period aligns with their intended holding period and that the revert rate or refinance cost has been modelled. Where the LVR exceeds 80 per cent and the interest only period is longer than 5 years or unspecified, the loan is classified as non-standard under APS 112, which may limit your lender options.

Tax Treatment of Positive Gearing Under Current and Future Rules

Under the current rules, a positively geared property generates assessable rental income. You declare the gross rent and deduct all claimable expenses including interest, property management, insurance, depreciation, council rates and repairs. The net profit is added to your taxable income and taxed at your marginal rate.

For properties acquired on or after 7:30pm AEST on 12 May 2026, the negative gearing quarantine applies from 1 July 2027, but this legislation does not affect positively geared properties. Because your rental income already exceeds your expenses, you have no loss to quarantine. The change does mean that if your property becomes negatively geared in a future year due to a rate rise or vacancy, you will not be able to offset that loss against your salary, only against other rental income or carry it forward.

Positive gearing also simplifies your position if you hold multiple properties. Rental profits from one property can offset rental losses from another under the new rules, so a positively geared asset in Hampton can absorb the loss from a negatively geared property elsewhere without affecting your employment income.

Why Positive Gearing Suits Owner-Occupiers Transitioning to Investors

Hampton residents who retain their current home as a rental when upgrading to a new property often find themselves holding two loans: an owner-occupier loan on the new purchase and an investment loan on the former residence. If the former home was purchased years ago at a lower price, the remaining loan balance may be small enough that rental income covers the repayment and holding costs, creating a positively geared position without any active strategy.

In a scenario like this, the rental income from the retained property improves serviceability for the new owner-occupier loan. Lenders treat the net rental income as additional income when assessing your capacity to service the new purchase. This is particularly valuable when the new property is near Hampton's median and requires a larger loan amount.

The transition also preserves access to the main residence capital gains tax exemption for the period you lived in the original property, and the cost base for CGT purposes is locked in at the time you first rented it out, not the original purchase date. If you sell the investment property after 1 July 2027, gains accruing before that date are taxed under the existing 50 per cent discount rule, and gains after that date are indexed for inflation with a minimum 30 per cent tax rate.

Where Positive Gearing Fits in a Broader Property Investment Strategy

Positive gearing prioritises cash flow and serviceability over tax deductions. It suits investors who want to build wealth through property without relying on salary income to cover shortfalls, and it aligns with a principal and interest repayment strategy that reduces debt over time rather than maximising leverage.

Many Hampton investors adopt a blended approach: one positively geared property that supports serviceability and one or two higher-growth properties that may be negatively geared but offer stronger capital growth prospects. The positively geared asset provides the income buffer that allows the portfolio to expand without triggering DTI restrictions or serviceability failures.

If you are weighing investment loan options and are uncertain whether positive gearing suits your circumstances, the answer depends on your income stability, tax position, and whether you intend to grow a portfolio or hold a single property long-term. Positive gearing offers less immediate tax relief but greater financial resilience, particularly if interest rates rise or rental markets soften.

Call one of our team or book an appointment at a time that works for you to discuss how positive gearing fits your investment loan structure and long-term property goals.

Frequently Asked Questions