The Pros and Cons of Positive Gearing Property Investment

A positively geared property is one where your rental income exceeds all holding costs, including mortgage repayments, rates, insurance, body corporate fees and maintenance.

The appeal is straightforward: you receive passive income from day one, and that income is taxable rather than creating a loss to offset against other earnings. With changes to negative gearing rules taking effect from July 2027, cashflow-positive investment is attracting renewed attention in Geelong, particularly from buyers targeting properties in affordable regional pockets or higher-yield dwellings close to hospitals, universities and transport hubs.

Why Positive Gearing Suits Some Geelong Investors

Positive gearing means you're building wealth without relying on salary or other income to cover a shortfall each month. The property funds itself, and any surplus can be reinvested, used to accelerate loan repayments, or set aside for future portfolio growth.

Consider a buyer who purchases a two-bedroom unit in Corio, close to the hospital precinct and TAFE campus. Rental demand in that area remains strong due to healthcare workers and students seeking affordable accommodation. With a purchase at the suburb's current median and a deposit of 25 per cent, the buyer secures an interest-only loan at current variable rates. Rental income covers the interest, council rates, insurance and strata levies, leaving a modest surplus each quarter. That surplus is taxable income, but the property requires no additional contribution from the buyer's wage.

This approach suits buyers who want financial freedom without the weekly or monthly drain that comes with negatively geared holdings, especially those approaching retirement or managing multiple properties where cumulative shortfalls add up.

Loan Structure: Interest-Only or Principal and Interest

Positively geared investors often choose interest-only repayments to maximise cashflow in the early years. This keeps the loan amount unchanged and the monthly commitment lower, which improves the surplus.

However, interest-only periods typically last five years, after which the loan reverts to principal and interest unless you refinance or request an extension. Once principal repayments begin, your monthly cost rises, and a property that was positively geared can slip into neutral or negative territory unless rents have increased or you've paid down the loan in the interim.

Some lenders allow successive interest-only periods for investment loans, but approval depends on your loan to value ratio, rental income and overall borrowing position. If you plan to hold the property long-term and want to maintain positive cashflow, factor in the reversion date when you're assessing whether the numbers work.

Alternatively, principal and interest from the start builds equity faster and reduces your loan amount each month. The repayments are higher, so the property may only break even or return a smaller surplus, but you're reducing debt while the tenant pays most of the cost. For buyers targeting financial freedom within a set timeframe, this approach accelerates the path to owning the property outright.

Fixed or Variable Rate for a Positively Geared Loan

A variable rate gives you flexibility to make extra repayments or switch loan features without penalty, and you benefit immediately when the Reserve Bank lowers rates. For positively geared holdings where cashflow is already tight, a rate cut can turn a modest surplus into a more comfortable buffer.

A fixed rate locks in your repayments for a set period, usually one to five years, which gives you certainty over your monthly cost and protects your surplus if rates rise. The downside is less flexibility and potential break costs if you need to refinance or sell before the fixed term ends.

Many Geelong investors split their loan, fixing a portion to lock in certainty and leaving the remainder variable for flexibility. This structure is particularly useful if you're planning to leverage equity for portfolio growth or if you expect interest rates to move in either direction over the next few years. Your mortgage broker can model different splits based on your risk tolerance and cashflow goals.

How the 2027 Negative Gearing Changes Affect Positive Gearing

From 1 July 2027, rental losses on residential properties purchased after 7:30pm AEST on 12 May 2026 can no longer be offset against wage or salary income. Losses are quarantined and can only offset future rental income or residential property capital gains.

If your property is positively geared, this change has no impact on your cashflow because you're not generating a loss to deduct. Your rental surplus is taxable income, and you continue to claim all deductible expenses, including loan interest, in full.

For buyers considering investment loans post-2027, positive gearing removes the reliance on tax deductions to make the numbers work. Properties that generate genuine rental yield become more attractive than those relying on capital growth and negative gearing to deliver returns over time.

Eligible new residential builds purchased after 12 May 2026 retain access to negative gearing, even after 1 July 2027. If you're comparing an established unit in Geelong West with a new build in Armstrong Creek, the new build allows you to offset losses against other income, while the established property does not. However, if the established property is already positively geared, the grandfathering distinction becomes irrelevant.

Finding a Property That Delivers Positive Cashflow in Geelong

Geelong's rental market varies significantly by suburb and property type. Units close to Deakin University's Waurn Ponds campus, the hospital precinct in North Geelong, and established apartment buildings near the Geelong CBD waterfront tend to deliver stronger rental yields than freestanding houses in premium suburbs like Newtown or Highton.

A higher purchase price reduces your rental yield unless rents are proportionally higher. A property purchased at the suburb's median with a rent of $450 per week delivers better cashflow than a property purchased well above median with a rent of $500 per week, even though the latter generates more total income.

You also need to account for vacancy rates and holding costs between tenants. Properties in high-demand rental areas recover faster when a tenant leaves, which protects your cashflow over the long term. Lenders assess rental income based on a vacancy rate assumption, typically 4 to 6 per cent, which reduces the income they'll use when calculating your borrowing capacity.

If you're targeting positive gearing, work backwards from the rent you expect to achieve. Calculate your loan repayments, add rates, insurance, strata fees if applicable, and maintenance, then compare that total to the rental income. If the rent exceeds your costs by a margin that accounts for vacancies and rate rises, the property is likely to remain positively geared for the medium term.

Borrowing Capacity and Lender Assessment

Lenders calculate your investment loan borrowing capacity using rental income, less a vacancy rate and sometimes a discount factor. Not all lenders apply the same assumptions, so your borrowing capacity can vary depending on which lender assesses your application.

APRA's debt-to-income cap limits how much lenders can approve for borrowers with a DTI of 6 times or greater. For investors, this cap applies separately to your investor portfolio. If you already hold multiple investment loans, adding another positively geared property may still push you over the DTI threshold, depending on your total debt and income position.

Lenders also apply a serviceability buffer of 3 percentage points above the product rate when assessing whether you can afford the loan. Even if your property is positively geared at current rates, the lender tests whether you could still service the loan if rates rose by 3 per cent. A property that's positively geared at a variable rate of 6 per cent might fail serviceability at an assessed rate of 9 per cent, particularly if your rental income is modest or you're carrying other debt.

For refinancing an existing investment loan to improve cashflow, a positively geared property gives you flexibility because you're not reliant on tax deductions to cover the shortfall. You can negotiate on rate discounts, switch to interest-only to free up cashflow, or consolidate debt to reduce your overall monthly commitment.

Tax Treatment of a Positively Geared Investment

Rental income is assessable income, and you're required to declare it in your tax return. You can claim deductions for all expenses incurred in earning that income, including loan interest, property management fees, council rates, insurance, repairs and maintenance, and depreciation on the building and fixtures.

Even though your property generates a surplus, your taxable rental income may still be low or nil after deductions. Depreciation and other non-cash deductions reduce your taxable income without affecting your cashflow, which means you can receive a surplus each month and pay little or no additional tax on that income.

A quantity surveyor prepares a depreciation schedule that sets out the deductions available for capital works and plant and equipment over the life of the asset. For newer properties, depreciation deductions can be substantial. For older established properties, particularly those built before 1985, depreciation is often minimal or exhausted.

If you're purchasing a positively geared property, factor in the after-tax position rather than just the gross surplus. Your accountant can model the tax impact based on your marginal rate and the deductions available for the specific property. This helps you understand the real cashflow benefit and whether the property supports your broader financial goals.

Doolan Finance works with property investors across Geelong to structure investment loans that align with your cashflow and portfolio objectives. Whether you're targeting a positively geared holding or comparing loan options for a new build or established property, call one of our team or book an appointment at a time that works for you.

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