Beginner's Guide to Positive Geared Investment Loans

Positive gearing means your rental income exceeds your property expenses, including loan repayments, from the start.

For Safety Beach investors, that typically means buying a property close to or above the local median, holding a smaller loan amount, or choosing an interest-only structure that keeps repayments low while rental returns stay strong. Properties near the beach and peninsula amenities tend to hold rental appeal, but the margin between rent received and expenses paid depends on how the loan is structured, not just where the property sits.

How Positive Gearing Works in Practice

A positively geared investment property produces more rental income each year than the combined cost of loan interest, rates, insurance, management fees and other holding costs. The surplus is treated as assessable income and taxed at your marginal rate. Unlike negative gearing, which relies on tax deductions to offset losses against other income, a positively geared property contributes cash flow from the outset.

Consider an investor who purchases a two-bedroom unit within walking distance of Safety Beach's foreshore. The property is rented year-round at a rate reflecting its proximity to local schools and Port Phillip Bay. The borrower holds a loan covering 60 per cent of the purchase price on an interest-only basis at current variable rates. Monthly repayments sit below the rental income received, and after accounting for body corporate fees, council rates, property management and insurance, a surplus of several hundred dollars remains each month. That surplus is taxable, but it also supports serviceability for future borrowing or provides a buffer against vacancy periods.

Why Loan Structure Matters More Than Property Type

The difference between positive and negative gearing often comes down to the deposit size, the loan amount and whether repayments include principal.

A larger deposit reduces the amount borrowed and the interest paid each month. An investor using equity released from another property or savings accumulated over time may hold a loan-to-value ratio below 60 per cent, which directly lowers the interest expense and increases the chance of positive cash flow. Switching from principal-and-interest to interest-only repayments also reduces the monthly cost, though it does not reduce the loan balance over time.

Variable rates typically sit below fixed rates in a falling rate environment, and interest-only periods of up to five years are common for investment property finance. Borrowers who choose a shorter interest-only period or revert to principal-and-interest earlier may find the repayment increase tips the property into negative gearing unless rental income rises to match.

Interest-Only Repayments and Cash Flow

Interest-only repayments keep monthly costs lower by deferring principal reduction to a later date or to the time of sale.

For an investor focused on cash flow rather than rapid debt reduction, an interest-only loan allows the rental surplus to be directed toward other investments, held as a buffer, or used to cover costs on a second property. The trade-off is that the loan balance does not reduce during the interest-only period, and the property's equity grows only through capital appreciation. When the interest-only period ends, repayments typically increase as principal is added back in.

Under the prudential framework, a long-term interest-only loan on an investment property with an LVR above 80 per cent and an interest-only term beyond five years is classified as non-standard, which may affect the rate offered or the lender's willingness to approve the structure. Most lenders cap interest-only terms at five years for standard investment loans, with the option to apply for an extension subject to a fresh serviceability assessment.

Rental Yield and the Safety Beach Market

Rental yield is the annual rent received divided by the property value, expressed as a percentage.

Safety Beach properties vary in yield depending on the property type and proximity to the foreshore. A unit or townhouse closer to schools and public transport may generate stronger rental returns relative to purchase price than a larger family home on a bigger block. Yield alone does not determine whether a property is positively geared, but it sets the baseline for rental income before expenses and loan costs are deducted.

In our experience, investors who target properties with yields above 4.5 per cent and maintain loan balances below 70 per cent of the property value have a clearer path to positive cash flow, assuming rental demand remains steady and vacancy rates stay low. The Mornington Peninsula has a year-round rental market supported by professionals, families and retirees, which reduces the risk of extended vacancies compared to purely seasonal tourist markets.

Tax Treatment of Positive Gearing

When rental income exceeds deductible expenses, the surplus is added to your assessable income and taxed at your marginal rate.

Interest paid on the loan, property management fees, council rates, insurance, body corporate fees, repairs and depreciation are all deductible under current ATO rules for the period the property is rented or genuinely available for rent. If total expenses exceed rental income, the property is negatively geared and the loss can be offset against other income, subject to the grandfathering rules introduced in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 for properties acquired after May 2026.

For positively geared properties, the taxable surplus reduces after-tax cash flow but does not eliminate it. An investor in a higher tax bracket pays more tax on the surplus than an investor on a lower marginal rate, which is why positive gearing often suits borrowers seeking reliable income or preparing for retirement rather than those prioritising immediate tax relief.

Building Equity Without Negative Cash Flow

A positively geared property lets you build equity through capital growth while covering its own costs.

Equity increases as the property appreciates in value or as the loan balance reduces. For a property held on an interest-only loan, equity growth depends entirely on the local market. For a property on principal-and-interest repayments, equity also grows through debt reduction, though monthly repayments are higher and may turn the property negatively geared unless rent rises.

Investors who prioritise cash flow over rapid debt repayment often hold multiple properties, each positively geared or close to neutral, rather than directing surplus income toward paying down a single loan. The cash flow from each property supports ongoing holding costs and provides capacity to service additional borrowing as equity grows across the portfolio.

Borrowing Capacity and Serviceability

Lenders assess borrowing capacity based on your ability to service the proposed loan at a rate at least 3.0 percentage points above the product rate.

A positively geared property improves your serviceability position because the rental income is counted toward your assessable income, subject to a shading factor that varies by lender. Most lenders apply rental income at between 70 and 80 per cent of the amount shown on the lease or rental appraisal, which accounts for vacancy periods, maintenance and management costs.

If you hold multiple investment properties, lenders aggregate the net rental position across your portfolio. A property that is positively geared strengthens your overall serviceability, while a negatively geared property reduces it. Under the debt-to-income lending limits that took effect in February 2026, lenders are restricted in how much they can lend to borrowers with a DTI ratio of six times or greater, which makes positive cash flow from existing investments particularly relevant when applying for a new loan.

When Positive Gearing Suits Your Strategy

Positive gearing suits investors who want income now rather than deferred gains, or who are approaching retirement and prefer not to rely on other income to cover property costs.

It also suits borrowers with limited capacity to absorb ongoing losses or those building a portfolio where each property must stand on its own serviceability. A retiree drawing down superannuation or a self-employed borrower with variable income may find positive gearing more sustainable than negative gearing, even if the tax deductions are smaller.

Investors who plan to hold property for the long term and are less concerned with short-term tax relief may also prefer positive cash flow, particularly where capital growth is expected over a decade or more. Safety Beach's proximity to Melbourne, local schools and the foreshore supports long-term demand, which helps maintain rental occupancy and capital values over time.

Call one of our team or book an appointment at a time that works for you. We work with residents across Safety Beach and the Mornington Peninsula to structure investment loans that match your income goals, tax position and long-term strategy.

Frequently Asked Questions