The invention discloses a hydrophobic group-containing cationic terpolymer and a preparation method and application thereof. The preparation method comprises the following steps: adding acrylamide, methacrylatoethyl trimethyl ammonium chloride and octadecyl acrylate in a molar ratio of (89.5-46.5):(10-50):(0.5-3.5) into a reaction container, then adding urea and a cationic surfactant into the reaction container, finally adding deionized water and stirring; dissolving the mixture in the reaction container, raising temperature of the mixed solution in the reaction container to between 30 and 35DEG C, adding the octadecyl acrylate again and stirring; adding an initiator into the mixed solution in the reaction container, preserving heat at a temperature of between 30 and 35 DEG C for polymerization reaction, and obtaining a translucent or milk-white colloid product after 3 to 6h; and pouring the product in acetone, precipitating the product, taking precipitate out, and extracting the precipitate by ethanol for 24h to prepare the hydrophobic group-containing cationic terpolymer. The preparation method has simple process, and has particularly obvious effect on flocculating and dewatering of substrate sludge.