Positive Gearing: What Not to Expect from Investment Loans

When Rental Income Actually Covers the Loan

A positively geared investment property generates rental income that exceeds all holding costs, including interest, rates, insurance, and management fees. Losses from established residential investment properties acquired after 12 May 2026 are deductible only against other income from residential properties, including capital gains on residential properties. For Randwick investors, this shift makes positive gearing far more appealing than it used to be.

Consider a medical professional in Randwick who buys a two-bedroom apartment close to the Prince of Wales Hospital precinct. The property rents for $850 a week and the loan sits at around $650,000. With an interest-only loan at current variable rates, the weekly interest portion comes to around $620, leaving $230 a week to cover council rates, strata levies, insurance, and property management. Once those costs are paid, the property breaks even or tips into surplus. That surplus becomes taxable income, but the investor avoids the restriction on deducting losses against salary.

How Lenders Assess Rental Income on Investment Loans

Lenders typically shade rental income when they calculate your borrowing capacity. Most apply a discount of 20 per cent to the stated rent, meaning $850 a week becomes $680 in the serviceability calculation. APRA requires all ADIs to 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 compounds the rental discount, so even a property that looks cash-positive on paper may still reduce how much you can borrow for a future purchase.

In our experience, buyers who already own a positively geared property in Randwick or nearby suburbs fare better when applying for a second investment loan than those carrying negatively geared assets. The shaded rental income still counts as income, and the property does not generate a loss that reduces your taxable income and therefore your declared earnings. The serviceability buffer remains the same, but the starting position is stronger.

Interest-Only or Principal and Interest for Positive Cash Flow

Interest-only repayments lower your monthly outgoings and make it easier to achieve positive cash flow, especially in the early years of ownership. 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. Most lenders offer interest-only terms of up to five years on investment loans at 80 per cent LVR or below without triggering a non-standard classification.

Switching to principal and interest reduces your cash flow but builds equity faster and may attract a slightly lower rate from some lenders. For a Randwick investor holding a property long-term, the choice depends on whether you value the surplus income now or prefer to reduce debt over time. Rental yields in the suburb sit around 3.5 to 4.0 per cent for units close to transport, which means positive gearing typically requires a loan-to-value ratio below 70 per cent or a strong rental return relative to the purchase price.

The Tax Position When Income Exceeds Expenses

Positive gearing means you pay tax on the surplus, but you also avoid the new restrictions on deducting losses. Losses from new builds acquired after 12 May 2026 can also continue to be deducted against all income. If you bought an established property after that date, any loss can only offset income from other residential investments, not your salary. A property that generates a small surplus keeps you out of that restriction entirely.

Randwick has a high proportion of medical professionals and public sector workers who earn steady salaries and prefer not to carry loss-making assets. A positively geared property still allows you to claim deductions for all genuine expenses, including interest, rates, insurance, repairs, and depreciation on fixtures and fittings. The difference is that after claiming those deductions, you still have income left over, and you pay tax on that amount at your marginal rate.

How Deposit Size and LVR Shape Your Cash Flow

The larger your deposit, the smaller your loan and the lower your interest cost. A Randwick investor who puts down 30 per cent instead of 20 per cent reduces the loan amount and the weekly interest bill by enough to turn a break-even property into a positively geared one. LMI is generally required by ADIs on residential loans where the LVR exceeds 80 per cent. Avoiding LMI also removes a significant upfront cost, which improves your overall return.

In a scenario where you buy a one-bedroom unit near Coogee Beach for rental purposes, a 70 per cent LVR might generate weekly interest of $420 at current rates, while the same property at 80 per cent LVR pushes that figure to $480. The rental income does not change, but the extra $60 a week in interest can be the difference between surplus and shortfall. Lenders price investment loans according to LVR bands, so a lower LVR also improves your rate, which compounds the benefit.

Fixed or Variable Rates for Positive Gearing Strategy

Fixed rates lock in your interest cost and make it simpler to predict whether the property will remain cash-positive over the fixed term. Variable rates fluctuate, so a property that generates a surplus today may not next year if rates rise. Most lenders allow you to split the loan between fixed and variable, which gives you some certainty while retaining the flexibility to make extra repayments or access an offset account on the variable portion.

Randwick investors with multiple properties often prefer variable rates on positively geared assets because the surplus income provides a buffer against rate rises, and the ability to refinance without break costs becomes valuable if a better rate appears elsewhere. Fixed rates suit buyers who want to lock in positive cash flow for a set period, particularly if they plan to use that surplus to fund living expenses or reduce debt on another property.

Vacancy and Holding Costs in the Eastern Suburbs

Vacancy rates in Randwick and surrounding suburbs remain low, typically under 2 per cent for well-maintained units close to the hospital precinct, the University of New South Wales, and the light rail. A low vacancy rate means rental income is more reliable, which makes positive gearing more sustainable. Even a short vacancy of four weeks can eliminate several months of surplus if your cash flow margin is thin.

Body corporate fees for units in Randwick vary widely depending on the age and facilities of the building. Older walk-up blocks might charge $800 to $1,200 a quarter, while newer buildings with lifts, security, and gyms can exceed $2,000 a quarter. Those fees are deductible, but they reduce your surplus and need to be factored into your cash flow calculation before you commit to a purchase. Council rates in Randwick Council area are comparable to neighbouring councils, but water usage and insurance costs also add up, particularly for strata-titled properties.

How Positive Gearing Affects Future Borrowing Capacity

A positively geared property improves your serviceability for future borrowing because the shaded rental income adds to your usable income and there is no loss to subtract. APRA activated a DTI lending limit on 27 November 2025, effective from 1 February 2026, applying to all ADIs. Each ADI may lend, measured on a quarterly basis, up to 20 per cent of new investor loans and up to 20 per cent of new owner-occupier loans to borrowers with a total DTI ratio of six times or greater. For high-income earners in Randwick, the DTI limit is more likely to bind than serviceability, but a positively geared property still helps because it adds to your income side of the ratio rather than just your debt side.

If you plan to buy a second investment property or upgrade your home in the next few years, a positively geared asset in your portfolio makes that transition smoother. Lenders will still apply the serviceability buffer and the rental income shading, but the absence of a loss means your borrowing capacity stays higher. Medical professionals in particular benefit from this structure because their income is already strong, and adding rental surplus rather than rental loss keeps them within lender policy limits.

Call one of our team or book an appointment at a time that works for you. We work with residents and medical professionals across Randwick and can walk through your borrowing capacity and loan structure before you start looking at properties.

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