How to Structure a Positive Geared Investment Loan

Positive gearing means your rental income exceeds all property expenses including loan repayments, body corporate fees, and maintenance.

Most investors chase tax deductions through negatively geared properties, but positive gearing delivers immediate cash flow and builds wealth without relying on your salary to fund the shortfall. The structure you choose for your investment loan directly determines whether a property generates surplus income or drains your cash reserves each month.

Loan Structure Determines Cash Flow Before Property Selection

Your loan repayment is typically the largest single expense on an investment property, which makes the loan structure more influential on cash flow than the property itself. An interest-only loan on a variable rate will have different repayment obligations compared to a principal and interest loan, and that difference often sits between positive and negative cash flow on the same property.

Consider a scenario where an investor purchases a regional property generating $480 per week in rental income. With an 80% loan to value ratio and an interest-only structure, the weekly interest cost might sit around $420, leaving $60 per week before other expenses like rates, insurance, and body corporate. Switch that same loan to principal and interest repayments and the weekly cost climbs closer to $550, turning a marginally positive property into a negatively geared one. The property hasn't changed, only the loan structure.

Interest-only periods on investment loans typically run for one to five years depending on the lender, after which the loan converts to principal and interest unless you negotiate an extension. That conversion increases your repayment and can shift a positively geared property into negative territory if you haven't planned for it.

Deposit Size and LMI Shape Your Borrowing Options

A larger deposit reduces your loan amount, lowers your interest cost, and improves your chances of positive cash flow. It also determines whether you pay Lenders Mortgage Insurance, which adds to your upfront costs and can be capitalised into the loan, further increasing your repayments.

Borrowing at 90% LVR with LMI capitalised means you're servicing a loan larger than the purchase price. If you're targeting positive gearing, that additional debt works against you. Borrowing at 80% LVR avoids LMI entirely and keeps your loan amount lower, which directly improves your weekly surplus.

Some lenders offer interest rate discounts based on your LVR. A loan at 70% LVR might attract a rate discount of 0.20% to 0.30% compared to a loan at 85% LVR. Over a loan amount of $400,000, that discount saves roughly $800 to $1,200 per year in interest, which translates to an extra $15 to $23 per week in cash flow. Small rate differences compound over time, especially when you're expanding your property portfolio and every dollar of surplus income increases your borrowing capacity for the next acquisition.

Regional Markets and Rental Yield Drive Positive Gearing Outcomes

Positive gearing typically requires a rental yield above 6%, which is uncommon in capital city markets but achievable in regional areas where purchase prices are lower relative to rent. Properties in mining towns, university hubs, or regional centres with strong employment bases often deliver yields between 6% and 8%, creating the conditions for positive cash flow.

The vacancy rate in your chosen location matters as much as the gross yield. A property delivering 7% yield becomes less attractive if the area experiences regular vacancy periods of four to six weeks between tenants. Consistent rental demand keeps your income stable and prevents cash flow gaps that erode the benefit of positive gearing.

In our experience, investors targeting positive gearing often choose established properties in regional areas over metropolitan fringe developments. Regional properties tend to have lower entry prices and higher yields, while new builds in growth corridors often carry price premiums that suppress rental returns in the short term, even though they may offer stronger capital growth over a longer horizon.

Fixed vs Variable Rates and the Cash Flow Risk

A fixed rate locks in your repayment amount for one to five years, which provides certainty when you're calculating whether a property remains positively geared. A variable rate fluctuates with market conditions, meaning your surplus can disappear if rates rise.

If you fix your rate and rental income increases over that period, your surplus grows because your repayment stays constant. If you're on a variable rate and the rate increases by 1%, your repayment rises immediately. On a $400,000 loan, a 1% rate increase adds roughly $77 per week to your interest cost, which can shift a property from $50 per week surplus to $27 per week shortfall.

The trade-off is flexibility. Fixed rates often come with restrictions on extra repayments, and breaking a fixed loan early can trigger significant costs. Variable rates allow you to make additional repayments, redraw funds, and refinance without penalty, which matters if your strategy involves using equity from one property to fund the next.

Some investors split their loan between fixed and variable to balance certainty and flexibility. A 50/50 split gives you partial protection against rate rises while retaining access to offset accounts and redraw on the variable portion.

Tax Treatment Shifts Under Recent Budget Changes

The 2026-27 Federal Budget introduced changes to negative gearing and capital gains tax that alter the financial equation for investors purchasing established residential property from 13 May 2026 onwards. From 1 July 2027, losses on these properties can only be offset against residential property income, not against wage income.

Positive gearing largely sidesteps this issue because you're generating surplus income rather than claiming a loss. You'll still pay income tax on that surplus, but you're not restricted in how you use the cash flow. Investors who were previously subsidising negatively geared properties from their salary may now find positive gearing more appealing, particularly if their strategy prioritises passive income over tax minimisation.

The CGT changes introduce a minimum 30% tax on capital gains from 1 July 2027, replacing the 50% discount for new purchases of established property. This doesn't directly affect your cash flow during the holding period, but it does influence your exit strategy and the overall return on investment when you eventually sell.

Claimable Expenses and How They Affect After-Tax Cash Flow

Even though a positively geared property generates taxable income, you can still claim deductions for interest, property management fees, insurance, repairs, and depreciation. These claimable expenses reduce your taxable income and improve your after-tax position.

Depreciation is particularly valuable on newer properties, where you can claim deductions for the building structure and fixtures without any actual cash outlay. On an older established property, depreciation may be minimal or non-existent, which means you'll pay more tax on your rental surplus.

As an example, an investor holds a property generating $3,000 per year in positive cash flow before tax. After claiming $8,000 in depreciation and other deductions, the net taxable income from the property is negative, so the investor receives the cash flow benefit without a corresponding tax liability. This combination of positive cash flow and negative taxable income is sometimes referred to as a tax-positive structure and represents the optimal outcome for many investors focused on building wealth through property.

Serviceability and Portfolio Growth

Lenders assess your ability to service an investment loan based on rental income, but they don't use 100% of the rent in their calculations. Most lenders apply a shading factor, typically 80%, to account for vacancy, maintenance, and other holding costs. If your property generates $500 per week in rent, the lender will assume $400 per week in their serviceability assessment.

Positive gearing improves your serviceability position because the property contributes to your overall income rather than creating a shortfall that must be funded from your salary. If you're planning to acquire multiple properties, this distinction becomes critical. A negatively geared property reduces your borrowing capacity for the next purchase, while a positively geared property can enhance it.

When buying your first investment property, the difference may be manageable. By the time you're holding three or four properties, the cumulative effect of negative cash flow can prevent further borrowing, even if you have sufficient equity. Positive gearing keeps your income statement strong and your borrowing capacity intact, which allows you to continue expanding your property portfolio without hitting serviceability limits.

Choosing Loan Products That Support Positive Gearing

Not all investment loan products are designed with positive gearing in mind. Some lenders offer specific investor packages with lower rates for interest-only loans or provide discounts based on the size of your portfolio. Others may charge higher rates for regional properties or apply additional servicing buffers that reduce your borrowing capacity.

Access to investment loan options from banks and lenders across Australia allows you to compare features like offset accounts, redraw facilities, and the ability to capitalise LMI or pay it upfront. An offset account linked to an interest-only investment loan can reduce your interest cost without affecting the deductibility of your repayments, which improves your after-tax cash flow.

Some lenders also offer rate discounts for refinancing investors who bring multiple properties across to their portfolio. If you already hold one or more properties and you're considering a refinance, consolidating your loans with a single lender may unlock lower rates and improve the cash flow position across your entire portfolio.

Call one of our team or book an appointment at a time that works for you to discuss how your loan structure and property selection align with your wealth-building objectives.

Frequently Asked Questions