What Is Positive Gearing and How Does It Work?
Positive gearing means your rental income exceeds all holding costs, including loan repayments, insurance, rates, and property management fees. You receive rental income each month after covering expenses, and that surplus is added to your assessable income and taxed at your marginal rate.
Consider a buyer who purchases a smaller villa unit in Templestowe Lower, financed with a principal and interest loan at 80 per cent LVR. The property generates rental income that covers the monthly repayment, body corporate fees, and council rates, with a modest surplus remaining. That surplus is treated as income and taxed accordingly. The investor receives regular cash flow, which can be used to accelerate the loan repayment or set aside for maintenance and vacancy periods.
This contrasts with negative gearing, where the property runs at a loss and that loss can be offset against other income under current rules. For investors who don't need tax deductions or who want passive income without relying on future capital growth to justify holding costs, positive gearing offers a more immediate return.
Why Templestowe Investors Are Considering Positive Gearing Now
Templestowe's proximity to established schools, Westfield Doncaster, and the Eastern Freeway has historically supported steady rental demand. Families and professionals who want access to the eastern suburbs without the price premium of inner Melbourne are drawn to the area, and vacancy rates tend to remain relatively low.
Investors approaching retirement or already drawing on a pension may find that generating taxable income from a property is more useful than creating a deductible loss. Positive gearing also reduces reliance on capital growth, which can be harder to predict over shorter timeframes. If you're holding a property for income rather than speculation, knowing the investment pays for itself from day one provides clarity and reduces the need to supplement repayments from your salary.
Templestowe's mix of established homes, townhouses, and villa units means there are property types that can deliver positive cash flow at different price points, particularly where the purchase is structured with a larger deposit or the loan is set up with principal and interest repayments rather than interest only.
How Loan Structure Affects Cash Flow on Investment Property
The way you structure your investment loan directly determines whether a property is positively or negatively geared. Interest only repayments reduce your monthly outgoing but also mean you're not paying down the loan balance, and lenders typically price interest only loans at a higher rate than principal and interest. Principal and interest repayments are higher each month but build equity and often attract a lower interest rate, which can tip a property into positive territory.
In a scenario where rental income is close to break-even, choosing a principal and interest structure with a variable rate and a modest rate discount can shift the property from neutral to positive. Lenders assess investment loan applications using a serviceability buffer of at least 3.0 percentage points above the loan product rate, so even if the property is positively geared at the current rate, you still need to demonstrate capacity to service the loan at a higher rate.
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Deposit size also plays a role. A larger deposit reduces the loan amount and therefore the monthly repayment, making it easier to achieve positive cash flow. At LVRs above 80 per cent, Lenders Mortgage Insurance is generally required, and the premium is added to the overall borrowing cost. For investors targeting positive gearing, keeping the LVR at or below 80 per cent avoids that additional cost and improves the monthly surplus.
What Property Types in Templestowe Support Positive Gearing
Smaller dwellings with lower purchase prices and lower body corporate fees tend to generate higher rental yields relative to the loan repayment. Older-style villa units and townhouses in Templestowe and Templestowe Lower can deliver stronger rental returns than larger family homes, particularly where the property is well-located near public transport, schools, or shopping precincts.
Properties with minimal maintenance requirements and established gardens also reduce the risk of unexpected expenses eroding your cash flow. Investors looking for positive gearing should focus on rental yield rather than land value. A property with strong land value and potential for future redevelopment may appreciate over time, but if the rental income doesn't cover the holding costs, it won't deliver the immediate income a positively geared strategy requires.
In our experience, investors who prioritise yield over capital growth tend to look for properties with solid rental demand, low vacancy risk, and manageable upkeep. Templestowe's established streetscapes, proximity to employment hubs in Doncaster and the city, and access to Templestowe Village and Anderson's Creek Primary School support consistent rental interest from families and downsizers.
Positive Gearing and the 2026 Tax Changes
From the 2027-28 income year, losses on established residential investment properties purchased after 12 May 2026 can only be offset against other residential property income, not against salary or wages. Properties already owned or under contract at that date are grandfathered and continue to allow losses to be deducted against all income until the property is sold.
For investors purchasing now, this changes the appeal of negative gearing. If the property runs at a loss and that loss can't be used to reduce your taxable income from other sources, the only benefit is future capital growth. Positive gearing removes that uncertainty. The property generates income from the outset, and while that income is taxable, it's also available to you immediately rather than locked into a speculative return years down the line.
Eligible new builds remain exempt from the new restrictions, meaning losses on those properties can still be deducted against all income. However, new builds often come with higher purchase prices and lower initial yields, which can make achieving positive cash flow more difficult. Established properties with proven rental histories and lower entry costs may be more suitable for investors seeking immediate income.
Interest Deductions and Holding Costs You Can Claim
Interest on borrowings used to purchase or hold rental property remains deductible against rental income. Other claimable expenses include council rates, insurance, property management fees, repairs, and depreciation on the building and fixtures. These deductions reduce your taxable rental income, but they don't change the fact that a positively geared property generates a net surplus that is added to your assessable income.
If you're holding the property through a period where it's vacant, such as during initial marketing or between tenants, you can still claim holding costs for the period the property is genuinely available for rent. The ATO requires evidence that the property was advertised and available, so keeping records of rental listings and agent correspondence is important.
Investors who want to maximise tax deductions while still achieving positive cash flow can use depreciation schedules to claim allowable deductions on fixtures and fittings without affecting the actual cash surplus. This allows the property to be cash flow positive while reducing the taxable income declared on your return.
How to Calculate Whether a Property Will Be Positively Geared
Start with the expected rental income, which you can estimate using recent rental listings for similar properties in the same area. Subtract the annual loan repayment, council rates, insurance, body corporate fees if applicable, property management fees, and an allowance for vacancy and maintenance. If the result is positive, the property is positively geared.
Most lenders provide calculators that estimate monthly repayments based on loan amount, interest rate, and loan term. You can adjust the deposit size and repayment type to see how those changes affect the monthly cost. When refinancing an investment loan, the same calculation applies. If your current rate is higher than what's available elsewhere, refinancing to a lower rate can shift a neutral or slightly negative property into positive territory.
Keep in mind that rental income can fluctuate with vacancy periods, and interest rates on variable loans can move up or down. Building a buffer into your calculation, such as assuming a slightly lower rental income or a slightly higher interest rate, helps ensure the property remains positively geared even if conditions change.
Fixed Rate or Variable Rate for Positive Gearing
A fixed rate provides certainty over your repayment amount for the fixed term, which makes it easier to predict cash flow and confirm the property will remain positively geared. However, fixed rates are generally higher than variable rates at present, and if the fixed rate is set too high, the property may not generate a surplus. Fixed rates also come with break costs if you need to exit the loan early, and they typically don't offer offset accounts or additional repayment flexibility.
A variable rate allows you to take advantage of rate cuts and often includes access to an offset account, which can reduce the interest charged on your loan if you park surplus cash flow or other savings in the offset. For investors who want to retain flexibility and actively manage their loan, a variable rate is often more suitable. Some investors use a split strategy, fixing a portion of the loan for certainty and leaving the remainder on a variable rate for flexibility, though this adds complexity to the structure.
For positive gearing, the priority is keeping the interest rate low enough that rental income exceeds all costs. Whether you achieve that through a fixed or variable product depends on the rates available at the time and your tolerance for rate movement.
Building Equity While Generating Income
One of the advantages of positive gearing combined with a principal and interest loan is that you're building equity each month while also receiving cash flow. As the loan balance reduces, the interest portion of each repayment falls and the principal portion increases, which accelerates equity growth over time.
This equity can be used to release equity for future property purchases, renovations, or other investments without needing to sell the property. Investors who want to grow a portfolio while maintaining cash flow often start with a positively geared property, use the surplus to accelerate repayments or save a deposit for the next purchase, and then leverage the equity in the first property to fund the second.
Templestowe's established property market and proximity to employment and education hubs support long-term capital growth, so a positively geared property in the area can deliver both immediate income and gradual appreciation. This reduces the reliance on speculative growth and provides a more balanced investment outcome.
When you're ready to explore how an investment loan can be structured to support positive gearing, or if you'd like to review your current investment property finance, call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
What does positive gearing mean for investment property?
Positive gearing means your rental income exceeds all holding costs, including loan repayments, rates, insurance, and property management fees. The surplus is added to your assessable income and taxed at your marginal rate.
Does positive gearing mean I pay more tax?
Yes, because the rental surplus is added to your taxable income. However, you're receiving actual cash flow each month, which can be used to pay down the loan, cover vacancies, or fund other investments.
Can I use an interest only loan and still have positive gearing?
It's possible, but interest only loans generally have higher rates and don't reduce the loan balance. Principal and interest repayments often attract lower rates, which can make it easier to achieve positive cash flow.
How do the 2026 tax changes affect positive gearing?
From the 2027-28 income year, losses on established investment properties purchased after 12 May 2026 can only be offset against other residential property income. Positive gearing avoids this issue because the property generates income rather than a loss.
What deposit do I need to make a property positively geared?
A larger deposit reduces your loan amount and monthly repayment, making positive cash flow easier to achieve. Keeping the LVR at or below 80 per cent also avoids Lenders Mortgage Insurance, which reduces overall borrowing costs.
