What is Negative Gearing and How Does it Work?

Negative gearing means your rental property costs more to hold than it earns in rent, creating a loss you can claim against your taxable income.

For Camberwell residents looking at investment loans, this strategy has shaped property portfolios across the suburb for decades. The mechanics are straightforward: when your rental income falls short of your property expenses, including loan repayments, you're negatively geared. That loss reduces your overall taxable income, which can mean a lower tax bill. The approach works when you're banking on capital growth to outweigh the annual shortfall you're funding from your own pocket.

How the Tax Deduction Actually Works

You subtract your total property expenses from your rental income. If expenses exceed income, that negative figure reduces your assessable income for the year. The Australian Tax Office lets you claim interest on your investment loan, property management fees, council rates, insurance, maintenance, and depreciation on the building and fixtures. Body corporate fees apply if you're buying a unit, which is common in areas close to Camberwell Junction where apartment stock sits alongside period homes.

Consider an investor who purchases a two-bedroom unit near Rivoli Cinemas with an investment loan amount of $800,000. Annual rental income might bring in $32,000, while loan interest at current variable rates could be around $40,000, plus another $8,000 in other claimable expenses like rates, insurance, and strata fees. That's a $16,000 annual loss. If this investor earns a salary of $120,000, their taxable income drops to $104,000. At marginal tax rates, that could mean a refund of several thousand dollars, though the exact amount depends on individual circumstances and deductions.

When Negative Gearing Makes Sense for Your Situation

This strategy suits investors with stable income who can absorb ongoing cashflow gaps and who expect property values to rise over time. You're essentially subsidising an asset each year while waiting for it to appreciate. That works if you're earning enough to cover the shortfall without affecting your lifestyle, and if you're holding the property long enough for capital growth to exceed the cumulative losses you've funded.

Camberwell's proximity to quality schools, Toorak Road retail, and CBD transport links has historically supported steady price growth, though past performance doesn't dictate future returns. Vacancy rates in the area tend to sit lower than outer suburbs, which means fewer weeks without rental income, though you still need a buffer for turnovers and unexpected repairs.

Interest Only vs Principal and Interest for Negative Gearing

Many investors choose interest only repayments to maximise their annual loss and therefore their tax deduction. When you're not paying down the loan principal, your repayments are lower and fully tax deductible, which increases the gap between income and expenses. An interest only investment loan on that same $800,000 might cost around $40,000 per year in repayments, whereas principal and interest could be closer to $50,000. The difference affects both your cashflow and your deduction.

Interest only periods typically run for one to five years before reverting to principal and interest, so this isn't a permanent structure. Some investors refinance to reset the interest only period, though lender policies and your loan to value ratio will determine whether that's an option. If you're planning to pay down debt over time or you want to build equity faster, principal and interest makes more sense, even if it reduces your immediate tax benefit.

The Cashflow Reality You're Funding

Negative gearing doesn't eliminate your losses, it just softens them through tax relief. You're still covering the shortfall each month from your salary or other income. If rental income is $2,600 per month and your loan repayments plus expenses total $4,000, you're finding $1,400 every month from somewhere else. Over a year, that's $16,800 out of pocket before you see any tax refund.

This is where borrowing capacity becomes relevant. Lenders assess whether you can service both your home loan and your investment loan while maintaining the negatively geared property. They'll factor in rental income at around 80% of the actual rent to account for vacancy and management costs, and they'll stress test your investment loan interest rate to ensure you can still afford repayments if rates rise. If your income doesn't support the combined debt, you may need a larger investor deposit or a co-borrower.

Positive Gearing as the Alternative

Positive gearing is when rental income exceeds all expenses, creating profit you pay tax on. This happens with higher yields or lower debt. Some investors prefer this because it creates passive income rather than draining it, though you lose the tax deduction advantage. Positively geared properties are less common in Camberwell, where yields tend to sit lower than growth areas further out, but they can emerge if you've paid down a significant portion of your loan or bought in a pocket with unusually strong rent demand.

If you're holding multiple properties, you might run some negatively geared and others positively geared to balance cashflow and tax outcomes. A portfolio growth strategy often involves leveraging equity from one property to fund the investor deposit on the next, repeating the process as values rise.

Capital Growth vs Rental Yield in Camberwell

Camberwell properties generally favour capital growth over rental yield. Median dwelling values in the suburb reflect demand for established homes near premium schools like Canterbury Girls and Camberwell Grammar, plus walkable access to Burke Road shopping and the Belgrave line. That demand supports price appreciation, but it also means purchase prices are higher relative to weekly rent, which compresses yields.

An investor weighing up investment loan options needs to decide whether they're chasing income now or growth later. Negative gearing aligns with the latter. You accept lower rental returns and fund the gap because you expect the property to be worth significantly more when you eventually sell. Stamp duty, Lenders Mortgage Insurance if your loan to value ratio exceeds 80%, and other upfront costs add to the capital you need to commit before the strategy starts working.

How Lenders Assess Investment Loan Applications

Lenders treat investment loan applications differently to owner-occupied lending. They'll want to see your rental income, but they'll shade it to account for periods between tenants. They'll also add a buffer to your investment loan interest rate when calculating serviceability, often 2-3% above the actual rate, to ensure you can still afford repayments if rates climb. Your existing debts, living expenses, and income stability all factor into whether your investment loan application succeeds.

Some lenders offer better investor interest rates or more flexible investment loan features if you're borrowing within certain loan to value ratio bands or if you're an existing customer. Others provide rate discounts for larger loan amounts or professional packages. Accessing investment loan options from banks and lenders across Australia means comparing not just interest rates but also offset account availability, redraw access, and whether the lender allows further equity release down the line.

Tax Benefits Beyond Negative Gearing

Depreciation is often overlooked but can add thousands to your claimable expenses each year without any actual cash outlay. Buildings constructed after 1987 depreciate at 2.5% annually, and fixtures like ovens, blinds, and carpets depreciate faster. A quantity surveyor's report costs a few hundred dollars and identifies everything you can claim. Renovation costs, pest control, gardening, and property management fees are all deductible in the year you incur them, while capital improvements like adding a deck or renovating a kitchen get added to your cost base and reduce capital gains tax when you sell.

Interest on your investment loan is deductible, but principal repayments are not. That's why some investors use offset accounts linked to their owner-occupied home loan to park surplus cash, reducing non-deductible interest there, while keeping their investment loan balance high to maximise tax deductions. Structuring debt correctly matters, and mistakes can cost you thousands in lost deductions over the life of the loan.

Negative gearing works when your income is high enough to absorb the shortfall, when you can hold the property long enough for capital growth to accumulate, and when tax deductions provide meaningful relief. For Camberwell investors, that often means targeting properties near transport, schools, and amenity where demand remains consistent, even if yields sit lower than outer suburbs. The strategy isn't suitable for everyone, and it requires careful planning around cashflow, loan structure, and long-term goals.

Call one of us or book an appointment at a time that works for you to discuss whether negative gearing aligns with your property investment strategy and how to structure your investment loan to support it.

Important: This does not constitute tax advice and it is recommended to seek advice from your Accountant or Financial Planner. This is also subject to change post the Federal Governments 2026 Budget Announcement.