Why Positive Gearing Should Anchor Your Next Investment

What Makes an Investment Loan Positively Geared

A positively geared investment loan produces more rental income than it costs to hold the property each month. The difference shows up as cash flow rather than a tax offset. This changes how you fund deposits on subsequent properties, how lenders assess your serviceability, and how your portfolio scales over time.

Consider a buyer who purchases a two-bedroom unit in Prahran with rental income of $2,800 per month. The loan is structured with interest-only repayments at a variable rate, costing $2,200 per month. Body corporate fees, council rates, insurance and property management account for $450 per month in holding costs. The investor retains $150 per month after all costs. That surplus, compounded quarterly and retained over three years, accumulates to over $5,500 before tax. That amount contributes directly to the next deposit or offsets holding costs during vacancy periods.

How Positive Gearing Affects Borrowing Capacity

Lenders assess investment loan serviceability using the actual rental income and the loan repayment calculated at a variable interest rate plus the 3.0 percentage point buffer required under APRA policy. Positive cash flow improves your debt-to-income ratio, which affects how much you can borrow for your next purchase. Under the DTI lending limits that took effect in February, ADIs are capped at 20 per cent of new investor loans to borrowers with a DTI ratio of six times or greater. If your rental income consistently exceeds your holding costs, your total income increases, your DTI ratio improves, and you remain within the lending threshold for subsequent purchases.

In our experience, the difference between a property that generates $150 per month in surplus and one that costs $150 per month to hold is not just $300 in monthly cash flow. It is the compounding effect on your ability to borrow again within two to three years rather than five to seven years.

Interest Only Versus Principal and Interest for Positive Cash Flow

An interest-only loan structure reduces monthly repayments and can be the difference between positive and negative cash flow. For a $600,000 investment loan, switching from principal-and-interest to interest-only reduces monthly repayments by approximately $1,200 to $1,400, depending on the loan product and your lender. That reduction often converts a negatively geared property into a positively geared one without changing the underlying asset.

Interest-only investment loans typically have an initial term of one to five years, after which the loan reverts to principal-and-interest unless you refinance your investment loan or negotiate an extension. Lenders apply higher risk weights to interest-only loans under APS 112, and most cap the LVR at 80 per cent without LMI for interest-only products. If you are targeting positive cash flow and your deposit allows you to stay below 80 per cent LVR, interest-only repayments are the most direct path to achieving it.

Fixed Versus Variable Rate for Investment Loan Cash Flow

Fixed rate investment loans lock in your repayment amount for a set period, which protects your cash flow against rate rises but removes the benefit of rate cuts. Variable rate investment loans allow you to take advantage of rate reductions and typically offer features such as offset accounts and redraw facilities that fixed rates do not. For positive gearing, the offset account is particularly useful because it reduces the interest charged on your loan without reducing the loan balance for tax purposes. Your interest deduction remains based on the full loan amount, but your actual interest cost decreases.

If your priority is preserving positive cash flow in a rising rate environment, a fixed rate provides certainty. If your priority is flexibility and you have cash reserves in an offset account, a variable rate allows you to reduce your effective interest cost while maintaining full deductibility. Some investors use a split loan structure, fixing a portion of the loan to protect a baseline level of cash flow and leaving the remainder on a variable rate to capture downward movements and access loan features.

Investment Loan Tax Treatment Under Current and New Rules

Investment loan interest is deductible against rental income and other assessable income under current law. For properties held at 12 May 2026 or contracts exchanged before that date, negative gearing remains fully deductible against salary and wages. For eligible new builds acquired after 12 May 2026, negative gearing also remains fully deductible. For established properties acquired after 12 May 2026 and settled after 30 June 2027, losses are deductible only against other residential property income, including capital gains on residential property. Excess losses carry forward.

Positive gearing eliminates exposure to this rule change. If your property generates surplus income, the restriction on loss deductibility does not apply to you. You retain full deductibility of interest and holding costs against the rental income, and you report the surplus as assessable income. The trade-off is that you pay tax on the surplus each year rather than carrying forward a loss to offset future gains. For investors who prioritise cash flow, portfolio growth and reduced reliance on salary income, that trade-off is acceptable.

Loan Features That Support Positive Cash Flow Strategy

Offset accounts linked to an investment property loan allow you to deposit surplus rental income, reduce the interest charged on the loan, and maintain liquidity without triggering a capital repayment. Because the loan balance does not decrease, your interest deduction remains based on the original borrowing, but your net interest cost falls. This structure is particularly useful for investors building deposits for subsequent purchases.

Redraw facilities allow you to access any extra repayments made on the loan, but withdrawals may affect your tax deductions if the redrawn funds are used for private purposes rather than investment purposes. Offset accounts avoid this issue because the funds are held in a separate transaction account and are never repaid into the loan. Most lenders charge a slightly higher interest rate for loans with offset accounts, but the benefit in flexibility and tax efficiency usually justifies the cost.

Why Prahran Properties Suit Positive Gearing

Prahran's proximity to Chapel Street, Prahran Market and the Melbourne CBD supports strong rental demand from young professionals, couples and students. The suburb offers a mix of period apartments, warehouse conversions and modern developments. Vacancy rates in the Prahran postcode typically remain below 2 per cent, which reduces the risk of extended periods without rental income. Properties within walking distance of Prahran or Windsor train stations attract premium rents relative to holding costs, particularly where body corporate fees are low and the property has been recently updated.

In Prahran, a two-bedroom apartment within 500 metres of public transport typically generates rental income in the range of $2,600 to $3,200 per month depending on the building quality and aspect. If the loan is structured with an LVR below 80 per cent and an interest-only repayment, the investor can often achieve positive cash flow without relying on depreciation or one-off deductions. That makes Prahran a viable location for first-time investors targeting surplus income rather than capital growth alone.

How Serviceability Assessment Changes With Positive Cash Flow

Lenders assess your capacity to service an investment loan by adding the rental income to your other income and deducting all loan repayments calculated at the product rate plus the 3.0 percentage point buffer. They also apply a shading factor to rental income, typically 80 per cent, to account for vacancy and collection risk. A positively geared property increases your net rental income after shading, which improves your overall serviceability and allows you to borrow more on your next purchase.

Under the DTI limits introduced in February, lenders measure your total debt against your total income, with investment rental income included in the income calculation. Positive cash flow increases the numerator, lowers the ratio, and keeps you within the 20 per cent cap for high DTI lending. If you are planning to expand your portfolio, positive gearing on your first property materially improves your ability to secure finance for your second and third properties without requiring additional salary income.

Call one of our team or book an appointment at a time that works for you. We can review your deposit, the rental yield on properties you are considering, and the loan structure that delivers positive cash flow from settlement.

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