Unlock the Secrets to Positive Gearing Property

Positive gearing happens when your rental income exceeds all property expenses including loan repayments, rates, insurance and body corporate fees.

The appeal is immediate: cash flow lands in your account each month instead of leaving it. For Mornington investors, the challenge lies in finding the right mix of deposit size, loan structure and property selection that allows rental income to cover costs without sacrificing long-term growth. Getting that balance wrong means either bleeding cash every month or locking yourself into a property that barely moves in value.

Why Mornington Attracts Positive Gearing Strategies

Mornington's rental market supports positive gearing because holiday and short-term rental demand remains high across summer and shoulder seasons, while long-term rentals cater to families and professionals working locally or commuting to Frankston and Melbourne.

A two-bedroom unit within walking distance of Main Street or the Esplanade can attract weekly rents between $450 and $550 depending on condition and proximity to the foreshore. At those rental levels, an investor with a 30 per cent deposit and a principal-and-interest loan can often cover all holding costs, particularly if body corporate fees remain below $1,500 per quarter. The key is matching the deposit and loan structure to the rental yield the property can genuinely sustain, not the yield advertised by a selling agent during a peak summer week.

How Loan Structure Affects Cash Flow

The loan structure you choose determines whether rental income covers your costs or falls short. Principal-and-interest repayments reduce the outstanding loan amount with each payment, but they cost more per month than interest-only.

Consider an investor borrowing $500,000 at current variable rates with a 25-year term. On a principal-and-interest basis, monthly repayments sit around $3,200 to $3,400 depending on the lender and rate discount. On an interest-only basis for five years, monthly repayments drop to roughly $2,300 to $2,500. If the property generates $2,000 per week in rent, that's around $8,600 per month. After rates, insurance, property management and body corporate fees totalling $1,800 per month, you're left with $6,800. That covers either repayment structure and leaves surplus cash flow. But if rent drops to $1,600 per week during winter or a vacancy period, monthly rental income falls to $6,900. Suddenly, the principal-and-interest loan creates a monthly shortfall, while the interest-only loan still generates a small surplus.

Interest-only loans make positive gearing easier to achieve in the short term, but you're not reducing the debt. That means your loan balance stays the same, and when the interest-only period ends, repayments jump. Lenders typically allow interest-only terms of up to five years on investment loans, after which the loan reverts to principal-and-interest unless you apply to extend. Some lenders will extend once, but repeated extensions are rare, and each application is assessed on current serviceability and property value.

What Happens When the Numbers Don't Add Up

Positive gearing relies on rental income staying high and vacancy periods staying short. Mornington's vacancy rate sits low during peak months, but winter can stretch vacancy periods to six or eight weeks if the property isn't positioned for long-term tenants.

In a scenario where an investor purchases a two-bedroom villa unit near the Mornington Racecourse with a 25 per cent deposit, the rental income might cover costs for nine months of the year. But if the property sits vacant for two months over winter and requires minor repairs between tenancies, the annual cash flow swings negative despite strong monthly returns during occupancy. The loan structure looked positive on paper, but it didn't account for seasonal gaps. Structuring the loan with a small offset account or redraw facility allows you to park surplus cash during high-income months and draw it down during vacancies, smoothing out the cash flow without switching to a loss-making position.

The Deposit Size That Makes Positive Gearing Possible

The larger your deposit, the smaller your loan, and the lower your monthly repayments. A 30 per cent deposit removes the need for Lenders Mortgage Insurance and reduces the loan amount enough that even moderate rental yields can cover repayments.

An investor purchasing a property at the current median for Mornington units with a 20 per cent deposit will pay LMI, increasing the loan amount by several thousand dollars. That additional cost raises monthly repayments and pushes the property closer to neutral or negative gearing. Increasing the deposit to 25 or 30 per cent avoids LMI entirely and brings repayments low enough that rental income has room to cover all expenses. The trade-off is tying up more capital upfront, which limits your ability to buy additional properties or retain a cash buffer for vacancies and repairs.

How Lenders Assess Rental Income for Serviceability

Lenders don't use your estimated rental income at full value when calculating serviceability. Most apply a shading factor of 20 per cent, meaning they assess serviceability using 80 per cent of the rental income.

If your property generates $2,000 per week, the lender assumes $1,600 per week for serviceability purposes. That shading accounts for vacancies, maintenance periods and rental market fluctuations. On top of that, lenders assess your ability to service the loan at an interest rate at least 3 percentage points above the actual product rate. So even if you're borrowing at 6.2 per cent, the lender tests whether you can afford repayments at 9.2 per cent. If you're relying on rental income to cover most or all of the repayment, the combination of shading and the serviceability buffer can limit how much you can borrow, even if the property genuinely generates enough rent to be positively geared in practice.

Fixed Rate or Variable Rate for Positive Gearing

Fixed rates lock in your repayment amount for a set period, which makes cash flow predictable. Variable rates move with the market, which means your repayment can increase or decrease depending on rate changes.

For positive gearing, predictability matters because you need to know the property will generate surplus cash flow every month. Fixing part or all of your loan removes the risk that a rate rise pushes you into negative gearing mid-year. The downside is that fixed rates typically sit higher than variable rates at present, so your starting repayment is higher. You also lose access to offset accounts and redraw on the fixed portion in most cases, which removes flexibility to manage seasonal cash flow. A split structure, with part of the loan fixed and part variable, allows you to lock in certainty on a portion of the debt while retaining access to features like offset and redraw on the variable portion. That combination suits investors who want stable cash flow but need some flexibility for vacancies or unexpected repairs.

Tax Treatment of Positive Gearing Under Current and Future Rules

Under current tax rules, rental income is fully assessable, and all deductible expenses including interest, rates, insurance and depreciation can be offset against that income. If your expenses exceed your rental income, the loss can be deducted against your salary or other income. If your rental income exceeds your expenses, the surplus is added to your taxable income and taxed at your marginal rate.

Positive gearing means you pay tax on the surplus cash flow. That's the trade-off for receiving income rather than creating a loss. For properties purchased on or after 7:30pm AEST on 12 May 2026, new tax rules take effect from 1 July 2027. If the property is an established dwelling, any rental loss from that date forward can only be offset against other residential rental income or carried forward. It cannot be deducted against salary or wages. Positive gearing avoids that issue entirely because there's no loss to quarantine. The rental income still gets taxed, but you're not affected by the loss quarantine rules. If you're considering a property that might swing between positive and negative gearing depending on vacancy or interest rate movements, the new rules mean any loss periods after 1 July 2027 won't reduce your tax on salary unless the property qualifies as an eligible new build.

When Positive Gearing Fits Your Investment Strategy

Positive gearing suits investors who want immediate cash flow, either to cover living expenses, fund further property purchases, or avoid drawing on salary to support an investment. It works when you can find a property with strong rental yield relative to purchase price, and when you have enough deposit to keep loan repayments manageable.

Mornington offers that combination in pockets. Older-style units near the town centre or foreshore, particularly those with lower body corporate fees and consistent rental demand, can deliver positive gearing with a deposit above 25 per cent. Newer apartments with higher body corporate fees and lower rental yields are harder to make positively geared unless you're putting down 35 or 40 per cent. The decision comes down to whether you value cash flow now over capital growth later. Positive gearing typically involves buying in areas or property types where rent is high relative to price, and those areas don't always deliver the same capital growth as tightly held family home markets. There's no single right answer, but clarity about your priority, whether it's income, growth, or a mix, shapes which loan structure and property type make sense.

If you're weighing up positive gearing as part of your property investment approach, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions