Positive Gearing and What Not to Overlook in 2027

A positively geared property generates rental income that exceeds all holding costs, including loan repayments, strata fees, and ongoing maintenance.

That definition has not changed, but the way investors approach it has shifted considerably since the negative gearing quarantine came into force on 1 July 2027. Properties acquired after 7:30pm on 12 May 2026 can no longer offset rental losses against wage or salary income unless they qualify as eligible new builds. The result is that more investors across the Hills District are now selecting properties with the intention of achieving neutral or positive cash flow from the outset, rather than relying on tax offsets to subsidise a shortfall.

Why Positive Cash Flow Matters More Under the Current Rules

Properties that generate surplus rental income allow you to service the loan, cover all holding costs, and retain the difference without relying on tax deductions to bridge a gap.

Under the quarantine rules introduced in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, net rental losses on properties acquired after 12 May 2026 can only be offset against other residential rental income or carried forward to offset future residential rental income or capital gains. They cannot reduce your taxable salary or wages. A positively geared property avoids that limitation entirely because there is no loss to quarantine. You still claim all deductible expenses, including interest, body corporate fees, and depreciation, but the rental income is sufficient to cover the outgoings and produce a surplus.

Consider an investor purchasing a dual-occupancy property in The Ponds. Combined rental income of $1,150 per week produces $59,800 annually. The loan is $650,000 at a variable rate, interest-only repayments of approximately $3,200 per month, plus $3,600 annually in strata levies and $2,400 in landlord insurance. Total holding costs sit at $44,400, leaving a surplus of $15,400 before tax. That surplus is assessable income, but the investor has not triggered the quarantine and retains full access to all other deductions. The property also benefits from land value appreciation in a growth corridor without requiring the investor to subsidise it from salary.

How Lenders Assess Rental Income for Servicing

Most lenders apply a shading factor of 80 per cent to projected rental income when calculating serviceability, and some reduce that further for properties with short rental histories or high vacancy rates.

The shading reflects the lender's assumption that rental income will not be received continuously across the life of the loan. Vacancy periods, tenant defaults, and maintenance downtime all reduce effective income. If a property generates $650 per week, the lender will typically assess it at $520 per week for borrowing capacity purposes. That shaded figure must still cover the loan repayments when tested at the serviceability buffer, which sits at 3 percentage points above the product rate under APRA's current prudential settings.

For properties in areas such as Kellyville or Bella Vista, where median rents have risen alongside population growth, the shaded rental income often supports higher borrowing without breaching debt-to-income caps. Investors with multiple properties may find that positively geared additions allow them to expand their portfolio without materially increasing their overall risk profile, particularly if earlier purchases remain negatively geared under grandfathered rules.

Interest-Only or Principal and Interest for Positive Gearing

Interest-only repayments reduce your monthly outgoings and increase the likelihood of achieving positive cash flow, but they also delay equity accumulation and may attract a higher interest rate.

Many lenders price interest-only investment loans between 10 and 40 basis points above equivalent principal and interest loans. That margin varies by lender, loan to value ratio, and borrower profile. An interest-only period typically runs for one to five years, after which the loan reverts to principal and interest repayments unless you negotiate an extension. The reversion increases your repayment substantially and can turn a positively geared property into a neutral or negatively geared one if rental income has not kept pace.

Principal and interest repayments build equity from day one and may qualify for a lower rate, but the higher repayment reduces your cash flow margin. For an investor focused on portfolio growth rather than immediate surplus, interest-only can preserve capital for further deposits. For an investor seeking passive income or preparing for retirement, principal and interest offers certainty and a defined end point. The choice depends on whether your priority is cash flow today or loan reduction over time. If you are weighing investment loan options across multiple lenders, compare both structures with the same deposit and property details to understand the trade-off in dollar terms.

Eligible New Builds and the Dual Benefit

Properties classified as eligible new builds under the Act retain access to negative gearing and receive an election between the 50 per cent capital gains tax discount and cost base indexation with a 30 per cent minimum tax rate.

An eligible new build is a dwelling constructed on previously vacant land or a development that increases the total number of dwellings on the site. A knock-down rebuild that replaces one dwelling with one dwelling does not qualify, nor does a substantial renovation. A new build that has been occupied for more than 12 months before sale to a subsequent investor loses eligibility for that purchaser, so timing and chain of title matter.

In the Hills District, land releases in Kellyville and Box Hill continue to attract investors seeking new builds that qualify under the carve-out. Rental yields on new townhouses and terraces in these precincts often sit between 4.2 and 4.8 per cent, which can produce positive gearing when combined with a deposit above 20 per cent and an interest-only loan structure. The new build status also preserves flexibility: if the property underperforms in the first few years, the investor can still offset losses against other income. If it performs well, the investor benefits from the same cash flow advantages as any other positively geared property, with the added option to choose the most tax-effective CGT treatment on sale.

Vacancy Rates and Income Stability in the Hills District

Vacancy rates in Baulkham Hills, Castle Hill, and surrounding suburbs have remained below 2 per cent through much of the past 18 months, supported by population growth and constrained supply of detached rental housing.

Low vacancy improves income stability and reduces the time a property sits untenanted between leases. A vacancy rate below 2 per cent typically indicates strong tenant demand, which also supports rental growth over time. Properties close to the metro stations along the Sydney Metro Northwest, schools such as Oakhill College and Tangara School for Girls, and retail centres including Castle Towers attract consistent inquiry from families and professionals relocating within Greater Sydney.

When assessing positive gearing potential, factor in the local rental market's depth. A property that achieves the median rent with minimal vacancy will outperform a property that sits at the upper end of the rent range but experiences longer turnaround periods. Rental appraisals from property managers active in the specific suburb offer more reliable guidance than online estimates, particularly for properties with non-standard configurations or recent renovations. If rental income is central to your property investment strategy, request appraisals from at least two agents and use the lower figure for your initial modelling.

Borrowing Capacity and the Debt-to-Income Cap

The debt-to-income cap introduced on 1 February 2026 limits the proportion of new investor loans a lender can write at six times gross income or higher to 20 per cent of their investor portfolio.

If your total proposed borrowing, including the new investment loan, exceeds six times your gross annual income, you may encounter lender restrictions even if you meet all other serviceability criteria. The cap applies at the lender level, not the borrower level, so one lender may have already reached their 20 per cent threshold while another has capacity remaining. Positively geared properties improve your serviceability position because the rental income, even after shading, contributes to your ability to service the debt. That can bring your effective debt-to-income ratio below the threshold or reduce the margin by which you exceed it.

For borrowers with existing home loans or investment debt, accessing equity to fund the next deposit without breaching the cap requires careful structuring. Some lenders will assess the equity release separately if it is used to purchase a property that demonstrably improves overall cash flow. Others apply a combined assessment. If you are expanding a portfolio, working with a broker who maintains current knowledge of each lender's DTI position and appetite can determine which lenders remain open to your scenario before you submit a formal application.

Claimable Expenses and Cash Flow After Tax

All interest on an investment loan, strata fees, council rates, landlord insurance, property management fees, repairs, and depreciation on the building and fixtures remain deductible regardless of whether the property is positively or negatively geared.

The difference is that a positively geared property produces assessable income that exceeds the deductions, resulting in a net rental profit that is added to your taxable income. That profit is taxed at your marginal rate. A negatively geared property that qualifies under the grandfathered rules produces a loss that reduces your taxable income from other sources. Under the quarantine, a negatively geared property acquired after 12 May 2026 produces a loss that can only be carried forward or offset against other residential rental income.

For an investor on a marginal tax rate of 37 per cent plus the Medicare levy, a $15,000 annual surplus from a positively geared property results in approximately $6,200 in tax, leaving $8,800 in after-tax cash flow. That after-tax surplus can be directed toward additional loan repayments, saved for the next deposit, or used to cover holding costs on other properties in the portfolio. The tax outcome is less favourable than a deductible loss, but the cash flow outcome is stronger because you are not funding a shortfall from your salary each month.

When Positive Gearing Becomes Neutral or Negative

A property that is positively geared at the time of purchase can shift to neutral or negative gearing if interest rates rise, rental income falls, or holding costs increase.

Variable rate movements have the most immediate impact. A 1 percentage point increase in the variable rate adds approximately $541 per month to the repayments on a $650,000 loan, or $6,492 annually. If your surplus was $8,000 before the rate rise, it reduces to $1,508. A second rate rise of the same magnitude turns the property negatively geared. Investors using interest-only loans also face reversion to principal and interest repayments at the end of the interest-only period, which can double the monthly repayment depending on the remaining loan term.

Rental income can decline if vacancy increases, tenant demand softens, or local economic conditions change. Holding costs can increase if strata levies rise, special levies are imposed for building remediation, or council rates are adjusted. If you anticipate any of these scenarios, model the property at a higher interest rate and lower rent to confirm the cash flow position remains acceptable under stress. If the property is only marginally positive at current settings, consider whether you have capacity to absorb a shift to neutral or negative gearing without requiring access to offsets that no longer exist under the quarantine rules.

Refinancing to Improve Cash Flow on Existing Properties

Investors with properties acquired before 12 May 2026 retain full access to negative gearing under the grandfathered rules, but many are refinancing to secure lower rates and improve cash flow as those properties appreciate.

A 0.3 percentage point reduction in the interest rate on a $500,000 loan saves approximately $1,500 annually. That saving can convert a negatively geared property into a neutral or positively geared one, or it can be redirected to reduce the loan balance more rapidly. Refinancing also allows you to restructure loan splits, adjust interest-only periods, or consolidate debt across multiple properties to simplify administration and reduce overall interest costs.

If you hold a property in Northmead or Castle Hill that has appreciated since purchase, the increased equity may support a top-up to fund further investment without requiring you to realise a capital gain. The additional borrowing remains deductible provided it is used to acquire or improve an income-producing asset. Lenders assess the combined serviceability of the existing and new debt, so the cash flow position of the existing property influences how much additional capacity you can access.

Positively geared properties generate income, build equity, and allow you to expand your portfolio without subsidising holding costs from your salary. The negative gearing quarantine has elevated their appeal, but they require disciplined selection, realistic rental appraisals, and careful attention to interest rate structure. The Hills District offers strong rental demand, low vacancy, and growing precincts where positive gearing remains achievable for investors who know what to look for and what to avoid.

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