The Return of Positive Gearing in 2021 - What Does it Mean for Investors?

Published 18 January 2021 by Team :Different

As a seasoned property investor, you already know the advantages of negatively gearing an investment property. But in recent years, the number of Australian investors negatively gearing their properties has plummeted (down to 60% in 2017, the lowest level since 2003).

Now, positive gearing is rising in popularity.

There’s a range of reasons to explain why market conditions are shifting. Right now, fixed-rate mortgages are being offered at the lowest levels we’ve seen in recent years. According to BuyersBuyers.com.au, over 30 lenders are offering rates under 2%, with some even offering fixed mortgages for 4-years under 2%. 

For investors like you, the combination of low mortgage rates and rising property values going into 2021 mean that it’s now possible, and even preferable, to positively gear investment properties (even in capital cities). 

Now, investors have a unique opportunity to positively gear their investment properties (even in capital cities). By understanding the current market trends, you’ll be able to capitalise on these emerging investment opportunities and reap the benefits of stable, ongoing returns.

What is positive gearing?

Let’s brush up on the basics. Positive gearing is an investment strategy where the funds you borrow to invest and the income you generate from your investment are higher than your expenses. As a result, you receive stable, consistent returns and a reliable source of passive income.

Read our explanation of positive gearing and negative gearing for more in-depth information.

Right now, market conditions are making it possible for investors to positively gear their investment property in typically competitive postcodes (such as capital cities). There are two main reasons:

1. Record low mortgage rates

Lenders are now offering some of the lowest mortgage rates on record. Off the back of the Reserve Bank slashing the official interest rate to a historically low 0.10% back in November 2020, many banks are now passing on these savings to buyers. 

According to Canstar, buyers can secure rates of under 2%, with investors also able to access fixed rates well under 3%. This is giving investors the perfect opportunity to secure a fixed-rate mortgage and positively gear their investment property. 

2. Attractive rental yields

Strong rental yields are also paving the way for investors to positively gear their investment properties in 2021. 

The trend towards remote working has pushed more tenants towards regional postcodes, leading to strong demand and limited supply (and the ability for investors to set higher rental rates).

But even in capital cities, investors are still able to secure properties with a strong rental yield between 4-6%.

What does this mean for property investors?

For the first time in decades, there are new opportunities for investors to use a positive gearing strategy (particularly in capital cities). 

Previously, it was challenging for investors to find properties in capital cities that would suit this strategy. Typically, capital growth and property prices are higher in capital cities, making it difficult for investors to earn an income from rental returns. That means a positive gearing strategy wasn’t feasible unless you were willing to invest in regional areas. 

Although rental yields for inner-city apartments in Sydney and Melbourne are expected to remain soft, demand for family homes in the capital city’s outer suburbs is expected to increase in the year ahead.

There are two key factors enabling this shift in the market:

  • Positive market sentiment going into 2021: the Australian Government has offered significant financial assistance to businesses and individuals in response to the pandemic, which has helped to prevent skyrocketing unemployment rates and even created new jobs (with a record number of job vacancies currently being advertised in Australia).
  • Optimistic outlook for a continued economic recovery: plus, Australia has successfully managed the outbreak of COVID-19 and confidence continues to rise with news of a vaccine rollout beginning nationwide in early 2021.

What to consider before positively gearing an investment property

While there is plenty of reason to consider a positive gearing strategy, it’s not without its potential risks. These include:

  • Risk of further lockdowns and border closures: the rise of community transmission during the pandemic may lead to future shutdowns and state border closures, which could have an impact on property markets and prices.
  • Rebounding property prices: with property prices tipped to rise in the year ahead, the window of opportunity for securing a positively geared property (particularly in a capital city) may be short-lived.
  • Ongoing tax considerations: it’s important to understand how positive gearing may impact your tax obligations, as the extra income you earn means you may need to pay tax on your investment earnings (which is something you’ll be wanting to reduce as an investor).

The bottom line: should you jump on the positive gearing train?

The combination of record-low mortgage rates and attractive rental yields are making positive gearing a more popular investment strategy than ever before. Current market conditions mean the timing is right for investors looking to generate a passive income from their investment property. 

For investors, the rise of positive gearing means that you can access stable, consistent returns from your investment property (even when investing in a capital city). The key is to invest in properties such as desirable family homes in the outer suburbs of capital cities which will generate lucrative rental returns and help you unlock positive cashflow. 

However, with property prices predicted to rise in the latter half of 2021, investors will need to move fast to capitalise on this rare investment opportunity.

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