When to Consider Positive Gearing for Investment Loans

Why Positive Gearing Changes Your Investment Loan Strategy

A positively geared property generates more rental income than it costs to hold each month, including loan repayments, council rates, insurance and body corporate fees. That surplus income can improve your borrowing capacity for future purchases, reduce reliance on personal income to service the loan, and provide passive income from the day you settle. In Oran Park, where new estates continue to attract families and the rental vacancy rate has remained low, investors are increasingly looking at properties that produce income rather than losses.

Investors typically choose between negative gearing, where the property costs more to hold than it earns in rent, and positive gearing, where the rental income exceeds holding costs. Negative gearing delivers a tax deduction against your salary or wages, which can be valuable if you are in a high marginal tax bracket. Positive gearing delivers surplus income, which is taxable but also serviceable when lenders assess your ability to borrow more. Neither is inherently superior. The right choice depends on your income level, your plans for portfolio growth, and whether you need the property to pay for itself.

Consider an investor who purchases a two-bedroom townhouse in one of Oran Park's newer precincts, close to public transport and the town centre. The property achieves rent that covers the principal and interest repayment, strata fees, insurance and council rates, with a small surplus each month. That investor now has a loan that services itself and a property that does not require additional salary support. When they approach a lender for a second investment loan twelve months later, that surplus rental income strengthens their serviceability assessment rather than reducing it.

How Lenders Assess Rental Income on Investment Loan Applications

Lenders typically apply a rental income discount when assessing your borrowing capacity. Most lenders will count only 80 per cent of the gross rental income when calculating your ability to service the loan. This discount accounts for vacancy periods, maintenance costs and rental arrears. A property generating $600 per week in rent will be assessed at $480 per week for serviceability purposes, even if the lease is current and the tenant has a strong payment history.

Lenders also apply a serviceability buffer to your loan repayment. Under current prudential regulation, your ability to repay must be tested at an interest rate at least 3.0 percentage points above the actual loan rate. If your investor rate is 6.2 per cent, the lender will assess your ability to service the loan at 9.2 per cent or higher. This buffer applies to both owner-occupied and investment property loans and can significantly reduce your borrowing capacity.

The formula for calculating whether a property is positively geared uses the actual rental income, the actual interest rate on the loan, and the full set of holding costs. The formula lenders use to determine your serviceability, however, applies the rental income discount and the serviceability buffer. A property that is positively geared in practice may still appear neutral or slightly negative when assessed under lending criteria. Understanding this gap is important when selecting a property and structuring your loan.

Interest Only Versus Principal and Interest for Positive Gearing

Investment loans can be structured as interest only or principal and interest. An interest only loan allows you to pay only the interest portion each month, which reduces the monthly repayment and can convert a negatively geared property into a neutral or positively geared one. A principal and interest loan requires you to repay part of the loan balance each month, which increases the repayment but also reduces the debt over time.

Interest only periods on investment loans are typically offered for up to five years, after which the loan reverts to principal and interest unless you negotiate an extension. If your goal is to maximise rental surplus and use that surplus to save for the next deposit, an interest only structure may suit. If your goal is to reduce debt and build equity within the property, a principal and interest structure will deliver that outcome faster.

For properties that are already positively geared, an interest only loan can increase the monthly surplus and improve cash flow. For properties that are close to neutral, an interest only period may be the difference between holding the property comfortably and needing to draw on personal income each month. Switching to principal and interest later, once your income rises or your portfolio generates enough rent to cover the higher repayment, is a common pathway.

Fixed Rate Versus Variable Rate for Investment Property Finance

Investment loans are available on a variable rate, a fixed rate, or a split between the two. A variable rate moves with changes in the lender's pricing, which typically follows movements in the Reserve Bank cash rate. A fixed rate locks in your repayment for a set term, usually between one and five years, after which the loan reverts to the variable rate unless you refix.

Variable rates on investment loans tend to offer features such as offset accounts, unlimited extra repayments, and the ability to redraw funds. Fixed rates generally restrict these features, particularly offset accounts, but provide certainty around your monthly repayment. If your property is positively geared and you want to direct the surplus into an offset account to reduce interest on another loan, a variable rate may offer more flexibility. If your property is only just positively geared and a rate rise would push it into negative territory, a fixed rate may protect your cash flow.

Some investors use a split rate structure, fixing part of the loan to lock in a minimum repayment and leaving the remainder on a variable rate to retain flexibility. This approach can suit investors who value both certainty and access to features like offset accounts. Your mortgage broker can model how different rate structures affect your cash flow and serviceability based on the rental income and holding costs of the specific property you are considering.

When Positive Gearing Supports Portfolio Growth in Oran Park

Oran Park has a relatively young demographic and a high proportion of families, which supports demand for three-bedroom houses and larger townhouses. Rental demand in the suburb has remained consistent as new housing estates mature and transport links improve. Investors who purchase properties that appeal to long-term family tenants often achieve lower vacancy rates and more stable rental income, both of which contribute to positive gearing outcomes.

A property that generates surplus income each month improves your ability to borrow for a second or third investment property. Lenders assess your total debt position, including all existing loans, when determining how much they will lend you. A positively geared property adds to your income side of the ledger rather than your expense side, which increases your borrowing capacity. An investor with two positively geared properties may be able to borrow more than an investor with one negatively geared property, even if the total equity position is similar.

Consider an investor who owns a townhouse in Oran Park producing a rental surplus of $150 per week after all costs, including the loan repayment. When assessed for a second investment loan, that $150 is counted as income, albeit after the 80 per cent rental discount, which adds approximately $120 per week to their serviceability. Over the course of a year, that additional income may increase their borrowing capacity by tens of thousands of dollars, depending on the lender's serviceability model and the investor's other commitments.

Tax Treatment of Positive Gearing Under Current Rules

A positively geared property generates taxable income. The surplus you receive each month is added to your assessable income and taxed at your marginal rate. You can still claim deductions for all allowable expenses, including interest on the loan, council rates, insurance, property management fees, depreciation and repairs. The difference is that your deductions are smaller than your rental income, which creates a net profit rather than a net loss.

For investors who purchase established properties after 12 May 2026, losses from those properties can only be offset against other residential property income from the 2027-28 income year onwards under current legislation. Losses cannot be deducted against salary or wages. This change has increased interest in positively geared properties, particularly among investors who do not want to carry a loss they cannot offset or who prefer to receive income rather than deductions.

Properties classified as new builds under the current definition can still be negatively geared against all income, and investors who held properties before 12 May 2026 retain full negative gearing until they sell. If you are purchasing an established property today and expect it to run at a loss, that loss will be quarantined unless you have other residential property income to offset it against. If you are purchasing a property that is positively geared, the tax outcome is straightforward. You receive income, you pay tax on the profit, and you retain the surplus.

Choosing Properties That Support Positive Gearing Outcomes

Properties that achieve positive gearing typically fall into one of three categories: lower-value properties with strong rental yields, properties in areas with high rental demand relative to purchase price, or properties purchased with a larger deposit that reduces the loan amount and therefore the interest cost. In Oran Park, investors may find positive gearing outcomes more accessible with townhouses or villas that have lower body corporate fees and purchase prices closer to the median for units rather than houses.

Rental yield is calculated by dividing the annual rent by the purchase price. A property purchased for $550,000 that achieves rent of $600 per week produces a gross yield of approximately 5.7 per cent. After holding costs and loan repayments, whether that property is positively geared depends on the interest rate, the deposit size, and the total expenses. A property purchased for $450,000 achieving the same $600 per week rent produces a gross yield closer to 6.9 per cent, which leaves more room for positive gearing even at higher interest rates.

Location also affects holding costs. Properties in Oran Park with lower strata levies, or standalone dwellings with no body corporate, reduce your monthly outgoings. Properties close to schools, parks and public transport tend to attract longer tenancies, which reduces vacancy periods and turnover costs. Selecting a property based on the income it will produce, rather than the capital growth you expect, requires a different assessment process. Your broker can help you model the cash flow for specific properties before you make an offer, using current rental data and lender serviceability criteria.

Borrowing Capacity and Debt-to-Income Limits for Investment Loans

From February 2026, lenders have been required to limit the proportion of new loans they write to borrowers with a debt-to-income ratio of six times or greater. The limit applies separately to investment loans and owner-occupier loans, with each lender allowed to write up to 20 per cent of new investor loans above that threshold each quarter. This does not mean you cannot borrow above six times your income, but it does mean lenders are managing their exposure to highly leveraged borrowers more carefully.

For investors, this makes income from positively geared properties more valuable. If your total debt including investment loans is approaching six times your household income, the rental surplus from a positively geared property may keep your ratio below the threshold or reduce the amount you need to borrow for your next purchase. Lenders calculate your DTI using your total debt, including all home loans, investment loans and other credit commitments, divided by your gross annual income, including salary, business income and net rental income after the 80 per cent discount.

If you plan to build a portfolio of multiple properties, structuring each property to produce income rather than losses will improve your ability to continue borrowing as your total debt grows. A negatively geared property adds to your debt without adding to your income, which increases your DTI and reduces your remaining borrowing capacity. A positively geared property adds to both your debt and your income, which can leave your DTI relatively stable or even reduce it if the rental income is high enough.

Refinancing Investment Loans to Improve Cash Flow

Investors who purchased properties several years ago may be paying higher interest rates than those currently available. Refinancing an investment loan to a lower rate can reduce your monthly repayment and convert a neutral or negatively geared property into a positively geared one without changing the property or the rent. Even a reduction of 0.5 per cent in the interest rate can save hundreds of dollars per month on a typical investment loan balance.

Refinancing also provides an opportunity to restructure the loan, such as moving from interest only to principal and interest, or vice versa, depending on your current priorities. If your goal is to maximise cash flow and build a deposit for the next property, refinancing to a lower rate on an interest only basis may deliver the outcome you need. If your goal is to reduce debt and increase equity, refinancing to a lower rate on a principal and interest basis will accelerate your repayment without increasing your monthly cost.

Lenders assess refinance applications using the same serviceability criteria as new purchases, including the rental income discount and the serviceability buffer. If your rental income has increased since you first purchased the property, or if your personal income has risen, you may also be able to release equity as part of the refinance to fund the deposit on a second investment property. Your broker can review your current loan structure and compare it to the options available across the panel of lenders they work with, including any costs associated with switching.

Call one of our team or book an appointment at a time that works for you. We work with investors across Oran Park who are building portfolios that produce income, and we structure loans around the properties you are buying and the outcomes you are working towards.

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