What our analysis shows
Our calculations, data as of 23 October 2026
- For a $220,000 Sydney flat renting at $650 a week, a 30-year home loan top-up at 6.2% leaves about $8,455 a year in hand after rent, running costs, tax and repayments.
- An unsecured green or personal loan over 7 years at 9.5% costs $43,148 a year in repayments. The flat then runs $16,346 a year short, because of the short term rather than the rate.
- If you have the cash, it can still pay to borrow. Cash in your offset saves home-loan interest that is not deductible; a loan for a rented flat is deductible. Keeping $220,000 in the offset and borrowing for the flat leaves you about $4,092 a year better off at a 30% tax rate.
- A construction loan only charges interest on what has been drawn. On a typical 4–5 month build that saves a few thousand dollars against borrowing the full amount on day one.
Year-one cash after rent, tax and repayments, Sydney flat
- Home loan top-up or redraw$8,455
- Construction loan (progress draws)$8,243
- Investment loan split$8,027
- Unsecured green or personal loan−$16,346
60 m² flat, $220,000 build, rent $650/wk, tax at 30%. Rates are our assumptions for comparison, not lender offers.
Four ways to borrow
| Option | Rate (assumed) | Interest, year 1 | Repayments, year 1 | Cash after everything |
|---|---|---|---|---|
| Home loan top-up or redraw | 6.2% | $13,640 | $16,169 | $8,455 |
| Construction loan (progress draws) | 6.4% | $14,080 | $16,513 | $8,243 |
| Investment loan split | 6.6% | $14,520 | $16,861 | $8,027 |
| Unsecured green or personal loan | 9.5% | $20,900 | $43,148 | −$16,346 |
Cash after everything: rent less vacancy, agent fees, insurance, maintenance and water, less tax after deducting interest, less the year's loan repayments.
The secured options come out within a few hundred dollars of each other. What separates them from the unsecured loan is the term: a seven-year loan repays principal far faster than a 30-year one, and the rent cannot keep up.
Cash or loan?
The comparison above holds even if you have the cash, for the tax reason given in our findings. What makes it work is a separate loan split used only for the flat, so the purpose of the borrowing is clear to the ATO; money moved through the offset and back loses that link.
How a construction loan works
The lender values the property "as if complete", approves the loan against a fixed-price contract and plans, and pays the builder in stages: deposit, slab, frame, lock-up, fixing and completion. Interest is charged only on what has been drawn. Banks typically give six months to make the first draw and 24 months to finish. A builder who asks for large payments ahead of these stages, or a cost-plus contract, will not suit most construction loans.
Interest and tax
If the flat is rented at market rent, interest on the money borrowed to build it is deductible against the rent. If the house and flat are funded from one loan that also covers your home, you will need to apportion. When a parent or child lives in the flat rent-free, there is no income and no deduction.
What lenders count
Lenders assess the new repayments against your income, and most count only part of the expected rent, commonly about 80%, after a valuer's rental appraisal. An approved flat with its own entry and meters is easier to value and to count. Unapproved flats are usually given no value at all.
If a parent is paying
A parent who pays to build a flat on a child's land can create a granny flat interest, which Centrelink treats differently from a gift. Lending money to a child instead counts as the parent's asset and is deemed to earn income. See a granny flat for your parents before money changes hands.
This week's worked example
Week of 19 October 2026. A new example, rule and owner report every Monday.
A 45 m² one-bedroom flat with a budget finish on a flat block, services 12 m from the house, in Greater Hobart: our model puts it at $134,400 turnkey ($118,500–$150,500), or $2,990 per m². At the area's median 1-bedroom bond rent of $428 a week it would return 13.1% net and pay back in 10.2 years after tax.
Rule check: Residential construction started after 15 September 1987 can be claimed as a capital works deduction at 2.5% a year for 40 years when the building earns rent.
From an owner (QLD, 2025): Another Brisbane-area owner found prefab units of any quality priced close to a small new three-bedroom house, and gave up.