What does positive gearing mean for property investors
A positively geared investment property produces rental income that exceeds all holding costs, including loan repayments, rates, insurance, and property management fees. The investor pays tax on the surplus income each year rather than claiming a loss against salary or wages.
The difference between positive and negative gearing sits in the cash flow, not the overall return. Consider a scenario where an investor purchases a dual-income unit in Parramatta at current median prices, placing a 30 per cent deposit. The rental income covers the loan repayment, body corporate levies, council rates, and insurance, with approximately $120 per week surplus. The investor declares that surplus as assessable income, pays tax on it at their marginal rate, and retains the balance as passive income. The property continues to appreciate, but the investor has not contributed any of their own salary to hold the asset during the year.
Under the legislation that took effect from the 2027-28 income year, losses on established residential investment properties acquired after 7:30pm AEST on 12 May 2026 are deductible only against other income from residential properties, including capital gains on residential properties. That change has shifted attention toward positive gearing as a strategy for investors who do not already hold residential property income to absorb losses.
How deposit size affects cash flow from day one
The deposit you place determines the loan amount, which in turn sets your repayment. A larger deposit reduces the amount borrowed and lowers the weekly or monthly outgoing, leaving more room for rental income to exceed costs.
An investor contributing a 20 per cent deposit on a property will generally need stronger rental yield to achieve positive cash flow compared to an investor placing 30 or 40 per cent. The difference in repayment between an 80 per cent loan-to-value ratio and a 70 per cent loan-to-value ratio can exceed $100 per week on a property financed at current variable rates, depending on the purchase price.
Where the deposit is below 20 per cent, Lenders Mortgage Insurance is generally required by lenders on residential loans where the LVR exceeds 80 per cent. The premium is capitalised into the loan amount or paid upfront. Either approach increases the total borrowing and reduces the likelihood of positive gearing unless rental income is particularly high. Investors seeking positive cash flow from the outset should consider whether a higher deposit, even if it delays purchase by several months, delivers better cash flow over the first few years of ownership.
Choosing between variable and fixed rates for rental yield
Variable rates allow repayments to move with market conditions, which can work in your favour during rate cuts but erodes cash flow when rates rise. Fixed rates lock in your repayment for a set period, which provides certainty for budgeting and removes the risk of rental income falling short during a rate increase.
For investors focused on maintaining positive gearing, the fixed rate period provides a buffer. If rental income exceeds the fixed repayment by $150 per week, that surplus remains protected for the term of the fix, regardless of what happens to the variable rate during that time. The trade-off is reduced flexibility. Breaking a fixed rate to access equity or refinance generally incurs break costs, and offset accounts are rarely available on fixed rate products.
A split structure, where part of the loan remains variable and part is fixed, allows the investor to retain some access to redraw or offset while locking in cash flow certainty on the fixed portion. The variable portion can be used to absorb extra repayments or linked to an offset account holding rental income, which reduces interest charged on that portion of the loan without affecting the repayment.
Interest only repayments and their effect on surplus income
Interest only repayments reduce the monthly outgoing compared to principal and interest repayments, because the borrower is not required to repay any of the loan balance during the interest only period. The lower repayment increases the likelihood of rental income exceeding total holding costs.
An investor borrowing $600,000 on an interest only basis will pay roughly $2,500 per month less than the same loan on principal and interest terms, depending on the rate. That difference can turn a marginally negative cash flow into a clearly positive one. The downside is that the loan balance does not reduce during the interest only period, so the investor builds equity only through capital growth, not through repayment of debt.
A long-term interest-only residential loan is classified as non-standard where the LVR is greater than 80 per cent and the contractual interest-only period is greater than five years or is not specified. Lenders apply different pricing and risk settings to non-standard loans, which may result in a higher rate or a requirement for a larger deposit. Most lenders offer interest only terms of up to five years on investment loans at standard pricing, provided the LVR is 80 per cent or below.
Investors who select interest only terms should confirm the rate applying after the interest only period expires. Some lenders apply a higher margin to the loan once it reverts to principal and interest, which can eliminate the cash flow benefit in later years.
Selecting property types and locations that support positive gearing in Sydney
Rental yield varies across property types and suburbs. Units and townhouses in areas with strong rental demand and moderate median prices generally deliver higher yields than detached houses in established suburbs with higher land values.
In Western Sydney, suburbs such as Blacktown, Mount Druitt, and Rooty Hill have historically produced higher rental yields due to a combination of lower median purchase prices and consistent tenant demand from families and essential workers. A two-bedroom unit purchased in these areas may deliver gross rental yields above 5 per cent, compared to 3 to 3.5 per cent for a comparable property in the Inner West or Eastern Suburbs.
The trade-off often involves capital growth expectations and tenant turnover. Higher yielding suburbs may experience more frequent vacancy periods or require more active property management. Investors should account for vacancy rates and average tenancy length when assessing whether rental income will remain above holding costs across a full year. Properties near transport hubs, including Parramatta, Bankstown, and Liverpool, tend to attract longer-term tenants due to access to employment and infrastructure, which supports consistent rental income.
Using an offset account to manage surplus income and reduce taxable interest
An offset account linked to the investment loan allows rental income to sit against the loan balance, reducing the interest charged each month without reducing the repayment amount. The investor continues to pay the same repayment, but a larger portion is applied to the principal, which reduces the loan balance faster.
The benefit for positive gearing is that surplus rental income remains accessible while reducing the total interest cost over time. The investor does not need to make additional repayments or lock funds into the loan. The rental income accumulates in the offset account, reducing interest on the outstanding balance, and can be withdrawn if needed for maintenance, repairs, or other holding costs.
Offset accounts are typically available only on variable rate investment loans, so investors using a fixed rate structure will not have access to this feature unless they adopt a split loan arrangement. In that case, the offset is linked to the variable portion, and rental income deposited into the offset reduces interest on that portion only.
How serviceability limits affect borrowing for positively geared properties
Lenders assess new borrowers' capacity to service a home loan, including a residential investment loan, at an interest rate that is at least 3.0 percentage points above the loan product rate. That buffer applies regardless of whether the property is expected to be positively or negatively geared.
Even where rental income exceeds holding costs, lenders typically apply a discount to rental income when assessing serviceability. Most lenders use 80 per cent of the rental income in their calculations, which accounts for vacancy periods and management costs. The remaining 20 per cent is disregarded, so the investor must demonstrate capacity to service the loan using their other income, even if the property is cash flow positive in practice.
From 1 February 2026, each lender may lend, measured on a quarterly basis, up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. Investors with high income relative to total debt will generally find it easier to meet serviceability requirements, even where rental income is only marginally positive. Those purchasing their second or third investment property may find their borrowing capacity constrained by the cumulative effect of existing loan commitments.
Tax treatment of positive gearing and surplus rental income
Rental income that exceeds holding costs is assessable income. The investor declares the full amount of rent received during the financial year and claims deductions for interest, rates, insurance, repairs, depreciation, and other allowable expenses. The surplus, if any, is added to the investor's other income and taxed at their marginal rate.
Investors in higher tax brackets pay more tax on surplus rental income than investors on lower marginal rates. A property generating $6,000 in surplus income over the year will result in $2,745 in additional tax for an investor on the 45 per cent marginal rate, compared to $1,230 for an investor on the 21 per cent rate. That difference does not eliminate the benefit of positive gearing, but it does reduce the after-tax cash flow.
Interest on borrowings used to acquire or hold residential rental property is deductible against assessable income to the extent the property is rented or held to produce assessable income. Investors should confirm that the loan is used solely for the purchase or holding of the investment property. If part of the loan is later refinanced for private purposes, that portion of the interest is no longer deductible, which can shift a positively geared property into negative territory.
Portfolio growth and leverage for investors with positive cash flow
An investor holding a positively geared property retains more of their salary each year, which can be redirected toward saving a deposit for a second property. The surplus rental income can also be accumulated in an offset account or used to accelerate repayment of the loan, building equity faster.
Where the first property has increased in value and the loan balance has reduced, the investor may be able to access equity to fund part or all of the deposit for a second purchase. Lenders assess serviceability for the second loan using the same buffer and debt-to-income limits, but the existence of positive cash flow on the first property can improve the investor's overall position, particularly where rental income is close to covering the full holding cost of that asset.
Investors who structure their first purchase to be cash flow positive from the outset often find it easier to demonstrate capacity for a second loan within two to three years, compared to those who rely on salary to cover a shortfall on a negatively geared property. If you are considering adding to your portfolio or accessing equity from an existing property, a refinance review can clarify how much capacity remains under current lending policy.
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Frequently Asked Questions
What deposit do I need to achieve positive gearing on an investment property?
A deposit of 30 per cent or more generally improves the likelihood of positive cash flow by reducing the loan amount and the weekly repayment. A 20 per cent deposit may still deliver positive gearing if rental yield is high enough to cover the larger repayment and all other holding costs.
Can I use an offset account with a fixed rate investment loan?
Offset accounts are typically available only on variable rate investment loans. Investors using a split loan structure can link an offset account to the variable portion, which allows surplus rental income to reduce interest on that part of the loan.
How does the interest only period affect positive gearing?
Interest only repayments are lower than principal and interest repayments, which increases the likelihood that rental income will exceed holding costs. The loan balance does not reduce during the interest only period, so equity builds only through capital growth.
Do lenders use the full rental income when assessing an investment loan?
Most lenders apply a 20 per cent discount to rental income when assessing serviceability, using only 80 per cent of the rent in their calculations. This accounts for vacancy periods and management costs, even if the property is positively geared in practice.
Is surplus rental income from a positively geared property taxable?
Yes. Rental income that exceeds deductible holding costs is assessable income and is taxed at your marginal rate. The surplus is added to your other income, and the tax payable depends on your total taxable income for the year.
