Do you know how negative gearing works for investors?

Negative gearing allows property investors to offset rental losses against their other income, reducing their overall tax liability.

The mechanics work like this: if your annual rental income falls short of your holding costs, including loan interest, property management fees, insurance, and maintenance, the resulting loss can be deducted from your taxable income. For properties held before 7:30pm AEST on 12 May 2026, this arrangement continues unchanged until you sell. From the 2027-28 income year, losses from established properties purchased after that date can only be offset against residential property income, not salary or wages.

Investment Property Finance in Templestowe

Templestowe's established property market presents specific considerations for investors structuring loans under the new rules. CoreLogic recorded 184 house sales to May 2026, with rental yields sitting at 2.95 per cent for houses and 4.02 per cent for units.

Consider a buyer who acquired an established four-bedroom house in Templestowe during September under the post-May rules. At the suburb's current four-bedroom median, with an 80 per cent loan and at current variable rates, the annual interest cost alone exceeds typical rental income for that property type by several thousand dollars. Under the grandfathering provisions, that investor cannot claim the loss against their salary until they generate offsetting income from other residential properties.

An investor in the same suburb who purchased before 12 May 2026, or who buys an eligible new build now, retains full deductibility against all income.

How Loan Structure Affects Tax Outcomes

Interest-only loans remain widely used for negatively geared properties because they maximise the deductible interest component. Every dollar of principal repayment reduces your loan balance and therefore your future interest deductions.

For an investor with a property purchased under the old rules, an interest-only period of five years preserves the full deduction. Lenders typically offer initial interest-only terms of one to five years on investment loan products, after which the loan converts to principal and interest unless you apply to extend.

APRA's Prudential Standard APS 112 classifies an interest-only loan as non-standard where the contractual interest-only period exceeds five years and the loan-to-value ratio is above 80 per cent. This classification attracts higher capital risk weights for lenders, which flows through to pricing. Most borrowers stay within the five-year threshold to avoid the premium.

The Deposit and Borrowing Capacity Question

Lenders assess investment loan applications using serviceability buffers and debt-to-income limits that differ from owner-occupier lending. APRA requires all lenders to test your ability to service the loan at a rate at least 3.0 percentage points above the actual product rate.

From 1 February 2026, each lender's quarterly investor lending where the borrower's total debt-to-income ratio reaches six times or higher is capped at 20 per cent of new investor loans. A Templestowe investor earning household income of $180,000 with existing debts of $400,000 and seeking a new $900,000 investment loan would sit at a combined DTI of 7.2 times, placing them within the restricted cohort. Not all applications in that range are declined, but lenders manage their quarterly allocations carefully.

A deposit of 20 per cent avoids Lenders Mortgage Insurance on most investment loans. Borrowing above 80 per cent LVR attracts LMI, calculated on a sliding scale and capitalised into the loan or paid upfront. State stamp duty on the LMI premium applies in some jurisdictions.

Claimable Expenses Beyond Interest

Interest is the largest deductible cost for most investors, but it is not the only one. Council rates, water charges, landlord insurance, property management fees, repairs, and depreciation on the building and fixtures are all claimable in the year they are incurred, provided the property is rented or genuinely available for rent.

Body corporate fees for units and townhouses are fully deductible. Depreciation schedules prepared by quantity surveyors identify claimable amounts for both capital works (the building structure) and plant and equipment (fixtures and fittings). A newer unit in one of Templestowe's villa developments will generate higher depreciation claims than an older house on a large block.

Borrowing costs, including loan establishment fees and legal fees for the mortgage, are deductible over five years or the loan term, whichever is shorter. Prepaid interest is deductible in the year it relates to, not the year it is paid.

Rental Income and Vacancy Considerations

Melbourne's metropolitan vacancy rate sat at 1.3 per cent in July 2026, reflecting persistent tenant demand. Templestowe's housing stock, characterised by larger family homes on established blocks, appeals to long-term tenants seeking school proximity and amenity.

Rental income must be declared in full, including any letting fees paid by the tenant. Periods of genuine vacancy where the property is advertised and available do not disrupt your deductions; you continue to claim all holding costs during that time. If you use the property for private purposes, even briefly, you must apportion expenses and only claim the rental period.

For properties held by foreign owners, an annual vacancy fee applies if the property is not occupied or genuinely available for rent for at least 183 days in a vacancy year. The fee, calculated as double the foreign investment application fee that applied to the purchase, is paid to the ATO within 30 days of the vacancy year ending.

Portfolio Growth and Equity Release

Many Templestowe investors already own their principal place of residence in the area and look to nearby suburbs such as Bulleen, Doncaster, or Templestowe Lower to build a small portfolio. Refinancing to release equity from an existing property allows you to fund the deposit on a second investment without liquidating other assets.

Equity release works by increasing the loan against your current property and using the released funds as a deposit elsewhere. The interest on the additional borrowing is deductible if the funds are used to acquire an income-producing asset. Keep the loans separated or maintain clear records; if you draw on the same facility for private purposes, only the portion used for investment remains deductible.

A Templestowe homeowner with a property valued at the suburb's current house median and an outstanding mortgage of $400,000 has substantial accessible equity at 80 per cent LVR. Lending against that equity to fund a deposit in a neighbouring suburb, where yields may be higher or entry prices lower, is a common strategy for building passive income over time.

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