Positive Gearing: What Not to Do When Rates Rise

A positively geared investment property generates rental income that exceeds all holding costs including loan repayments, rates, insurance and maintenance.

That surplus offers breathing room in a rising rate environment and the flexibility to hold through vacancy without dipping into your own pocket. But achieving positive cash flow depends on more than just choosing a suburb with strong rental yields. Loan structure, deposit size and timing all influence whether a property remains cash flow positive or slides into neutral territory when conditions shift.

The Mistake That Erodes Positive Gearing Before Settlement

Borrowing the maximum amount a lender will approve often leaves no buffer for rate increases or vacancy periods. A property returning 6 per cent gross rental yield might appear cash flow positive when modelled at a 5.8 per cent interest rate, but if rates move to 6.5 per cent or the property sits vacant for four weeks, the surplus disappears.

Consider a buyer purchasing a two-bedroom unit in Launceston's Riverside precinct. Rental demand from relocating professionals and proximity to the Northern Suburbs means the property commands steady weekly rent. The buyer borrows at 80 per cent loan to value ratio on a principal and interest loan. At the current variable rate, weekly rent covers loan repayments, body corporate, council rates and insurance with a modest surplus of around $40 per week. Six months later, the lender reprices variable loans upward by 0.4 percentage points. The surplus drops to $15 per week. A single vacancy period of three weeks eliminates the year's positive cash flow entirely.

The problem is not the property or the location. The issue is borrowing to capacity without accounting for movement in either rates or occupancy. Positive gearing relies on a margin of safety, and that margin is determined by how much you borrow, not just what you buy.

How Principal and Interest Repayments Reduce Early Cash Flow

Principal and interest repayments are higher than interest only repayments, which reduces net cash flow in the early years of ownership. An investment loan structured as interest only for an initial period preserves cash flow and allows surplus income to be directed toward other investments or offset accounts linked to non-deductible debt.

Interest only is not suitable for every investor. If your goal is to reduce debt over time and build equity through forced repayment, principal and interest makes sense. But if the priority is maximising cash flow and reinvesting surplus income, interest only during the first five years often delivers better outcomes. The principal portion of a loan repayment is not tax deductible, so paying down principal with after-tax dollars while carrying other higher-cost debt such as an owner-occupied mortgage rarely makes financial sense.

Tasmania's rental vacancy rate has remained below 1 per cent in several regional centres, meaning rental income is relatively stable. That stability makes interest only a lower-risk choice than it would be in markets where vacancy is unpredictable. Just ensure your loan product allows you to switch to principal and interest later without penalty, and that you have a plan for refinancing or paying down the loan before the interest only period ends.

What Not to Do When Selecting an Investment Loan Product

Choosing a loan based solely on the advertised interest rate ignores the features that protect cash flow when circumstances change. A loan with a slightly higher rate but no ongoing fees, free additional repayments and a redraw facility often costs less over five years than a discounted loan with high exit fees and limited flexibility.

Some lenders offer investor-specific loan products with features such as rental income assessed at 80 per cent of the lease amount rather than the standard 75 per cent, which increases borrowing capacity. Others allow multiple offset accounts, which is useful if you plan to build a portfolio and want to park surplus cash against the loan without losing access to it. The difference between a loan that supports your investment strategy and one that constrains it is rarely visible in the headline rate.

If you are considering refinancing an existing investment loan, compare not just the interest rate but the total cost including valuation fees, discharge fees from your current lender, and any LMI that may apply if your loan to value ratio has increased due to falling property values. A rate 0.3 percentage points lower saves around $600 a year on a $200,000 loan, but if switching costs $2,500 upfront, the break-even point is over four years.

How Negative Gearing Changes from July 2027 Affect Positive Gearing Strategy

From 1 July 2027, investors who purchase established residential property will no longer be able to offset rental losses against wage income. Losses will be quarantined and can only be used against future rental income or capital gains from residential property. Properties purchased before 7:30pm on 12 May 2026 are unaffected, and new builds that increase housing supply retain full negative gearing.

This change makes positive gearing more attractive because cash flow positive properties continue to generate surplus income regardless of how tax law treats losses. If you are acquiring property after the legislation takes effect, targeting positive cash flow insulates you from the quarantining rules entirely. You do not rely on tax refunds to make the investment viable, and surplus income can be reinvested or used to service additional borrowing for portfolio growth.

Investors who purchased prior to the cut-off date and are negatively geared may choose to hold those properties long term and use any surplus borrowing capacity to acquire new positively geared properties. The grandfathered properties retain the tax offset, and the new acquisitions generate cash flow. That approach preserves flexibility and avoids forcing a sale purely for tax reasons. If your goal is portfolio growth, structuring each acquisition to be cash flow neutral or positive from day one reduces your reliance on wage income to cover shortfalls.

When Location in Tasmania Supports Positive Gearing and When It Does Not

Hobart's inner suburbs such as North Hobart and West Hobart deliver capital growth over time but rental yields typically sit between 3.5 and 4.5 per cent, which makes positive gearing difficult unless you have a deposit above 30 per cent. Regional centres such as Devonport and Burnie offer gross yields between 5.5 and 7 per cent, and holding costs are lower due to cheaper council rates and body corporate fees where applicable.

A unit in Devonport close to the hospital and port precinct can generate weekly rent that comfortably exceeds repayments on an 80 per cent LVR loan, particularly if the loan is structured as interest only. The same purchase price in Kingston, where demand from public sector workers and families keeps rents relatively high but purchase prices have also increased, may only break even on a principal and interest loan. The difference is not tenant quality or vacancy risk but the ratio between purchase price and achievable rent.

If you are targeting positive gearing, look at suburbs where median prices have remained stable or grown modestly while rents have increased due to low supply. Avoid assuming that higher rent always equals positive cash flow. A property returning $500 per week sounds appealing, but if the purchase price is high enough that loan repayments consume $480 of that amount, the surplus is too thin to withstand any increase in rates or costs.

Why Offset Accounts and Redraw Matter More for Positive Gearing

Positive gearing generates surplus cash, and where that surplus is held determines whether it works for you or sits idle. An offset account linked to an owner-occupied loan reduces the interest payable on that non-deductible debt, which is a better outcome than leaving the cash in a savings account earning taxable interest.

Redraw facilities allow you to park surplus cash against your investment loan and withdraw it later if needed, but redrawn funds may not retain their deductibility if used for private purposes. If you plan to redraw to fund a deposit on a second investment property, the redrawn amount remains deductible. If you redraw to renovate your home, it does not. The Australian Taxation Office has issued guidance on this distinction, and getting it wrong can result in disallowed deductions.

If your investment loan does not offer an offset account, consider whether linking an offset to your owner-occupied debt and structuring your loans separately delivers a better result. The goal is to ensure every dollar of surplus income reduces your total interest cost, and that requires deliberate loan structure rather than accepting whatever your lender offers as the default.

How Borrowing Capacity Limits Positive Gearing Strategy

Lenders assess rental income for investment property at 75 to 80 per cent of the lease amount to account for vacancy and management costs. That discount affects how much additional borrowing capacity the property generates, even if the property is positively geared in practice. A property generating $25,000 per year in rent is assessed as generating $18,750 to $20,000 for serviceability purposes, and loan repayments plus other commitments must be serviceable within that reduced figure.

From 1 February 2026, lenders also apply a debt to income cap, which limits the total amount you can borrow to a multiple of your gross income. If your household income is $120,000 and the lender applies a DTI limit of six times income, total borrowing across all loans cannot exceed $720,000. That cap includes your owner-occupied mortgage, investment loans, car loans and credit card limits. A positively geared property improves your cash flow but does not increase your DTI capacity unless you can demonstrate a track record of receiving rental income over multiple years.

If you are planning to build a portfolio of positively geared properties, focus on acquiring the first property while your DTI ratio is still below the cap. Each subsequent property adds to your total debt, and even if the rental income covers repayments, lenders assess serviceability conservatively. Working with a broker who understands how different lenders treat rental income and apply DTI caps can mean the difference between approval and decline on a second or third purchase. Charm Finance works with a panel of lenders across Australia, which allows us to match your circumstances to the lender most likely to support your investment strategy.

Positive gearing is not a product or a rate. It is the outcome of deliberate decisions about what you buy, how much you borrow, and how the loan is structured. The properties that remain cash flow positive through rate rises and vacancy are the ones where the buyer left room for conditions to change. Call one of our team or book an appointment at a time that works for you.

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