Simple hacks to finance a holiday rental property

A holiday rental gives you rental income when you want it and a place to stay when you need it.

That split-purpose model changes how lenders assess your application. Most treat holiday rentals as investment property, but the income calculation is different because occupancy fluctuates and personal use reduces the rental yield. If you plan to use the property yourself for part of the year, the lender will discount the rental income accordingly. That discount can be 20 per cent or more depending on the policy, and it shrinks your borrowing capacity before you even submit an application.

How lenders adjust rental income for holiday properties

Lenders apply a haircut to the expected rental income to account for vacancy and personal use. A standard long-term rental might be assessed at 80 per cent of market rent. A holiday rental in a high-demand coastal town might be assessed at 60 per cent or less, depending on how many weeks you intend to occupy it yourself.

Consider a two-bedroom unit near the coast that generates $40,000 a year in short-term bookings. If you disclose four weeks of personal use, the lender might assess the income at $32,000 or lower. That reduced figure flows into the serviceability test, which now includes a three percentage point buffer above the actual rate and a debt-to-income cap that applies separately to investor loans. The DTI cap allows lenders to fund up to 20 per cent of new investor loans at six times income or more, but most prefer to stay well under that threshold for holiday properties because of the income variability.

Interest-only or principal and interest

Interest-only repayments reduce your monthly outgoings and can improve cashflow if the rental income covers the interest but not the full principal and interest repayment. Most lenders offer interest-only terms of up to five years on investment loans, after which the loan reverts to principal and interest unless you negotiate an extension.

The income from a holiday rental is rarely as stable as a long-term lease, so some investors prefer the cashflow breathing room that interest-only provides. Others want to build equity faster and choose principal and interest from the outset, particularly if they plan to hold the property long term or use it as a stepping stone to a larger portfolio.

The choice also affects your tax position. Interest on the loan is deductible, but only to the extent the property is rented or genuinely available for rent. If you use the property for personal holidays and do not make it available to tenants during that time, the ATO will disallow a proportionate share of the interest deduction. Keep a booking calendar and records of when the property was advertised, because the ATO has tightened compliance on holiday rental claims.

Negative gearing and the July 2027 changes

Under current rules, if your rental expenses exceed your rental income, you can offset that loss against your salary or other income. That arrangement is called negative gearing, and it has been a standard feature of property investment in Australia for decades.

From 1 July 2027, that changes for most residential property acquired after 7:30pm AEST on 12 May 2026. Net rental losses on those properties will be quarantined and can only be offset against other residential rental income or carried forward to offset future rental income or capital gains. The loss cannot be used to reduce your taxable wage income.

There is an exception for eligible new builds. If you buy a holiday rental that has been constructed on previously vacant land, or that replaces an existing property and increases the total number of dwellings, you can still negatively gear it under the existing rules. The property must be genuinely new, not a knock-down rebuild that leaves the dwelling count unchanged. If the new build is occupied for more than 12 months before you buy it, the exception does not apply to you as the second owner.

If you are considering a holiday rental and want the flexibility to offset losses against your wage income, buying before the rules take effect or choosing an eligible new build are the two paths that preserve that option. Properties you already own or have under contract as at 7:30pm AEST on 12 May 2026 are grandfathered and continue under the old rules until you sell.

Variable or fixed rate for a holiday rental

Most lenders offer both variable and fixed rate options on investment loans, including holiday rentals. A variable rate gives you the ability to make extra repayments and redraw if the loan allows it, and you benefit immediately if rates fall. A fixed rate locks in your repayment for the term you choose, usually between one and five years, but you lose flexibility and may face break costs if you repay early or sell the property during the fixed period.

Holiday rental income can swing with the season, so some investors prefer the flexibility of a variable rate. Others fix part of the loan to create certainty around the repayment, particularly if they are holding the property for the long term and want to smooth out rate movements. A split loan, where half is fixed and half is variable, is common for investment loans and gives you a middle path.

Loan to value ratio and lender mortgage insurance

Most lenders will lend up to 80 per cent of the property value for an investment loan without charging lenders mortgage insurance. If you borrow more than 80 per cent, LMI applies and the premium is added to your loan or paid upfront. LMI protects the lender, not you, and the cost can be several thousand dollars depending on the loan amount and the LVR.

For a holiday rental, some lenders cap the LVR at 80 per cent regardless of your willingness to pay LMI, because they view the income as less certain than a long-term lease. Others will lend up to 90 per cent if your financial position is strong, but the LMI premium at that level can erode the return you are expecting from the property. If you have equity in your home, using that equity as part of your deposit can keep the LVR on the holiday rental below 80 per cent and avoid LMI altogether.

Strata fees and claimable expenses

If the holiday rental is in a strata complex, the body corporate fees are deductible, along with council rates, water, insurance, property management fees, and the interest on your loan. Repairs and maintenance are also deductible in the year you incur them, but improvements that add value to the property must be depreciated over time.

Many coastal holiday properties come with higher body corporate fees because of shared facilities such as pools, gyms, and concierge services. Those fees can run to several thousand dollars a quarter, and they reduce your net rental income even though they are deductible. Factor them into your cashflow projection before you commit to the purchase, because lenders will include them in the serviceability assessment.

Stamp duty on the purchase is not deductible, but it is added to the cost base of the property for capital gains tax purposes. From 1 July 2027, the CGT treatment changes for most residential investment property acquired after that date. The 50 per cent discount is replaced with cost base indexation and a minimum 30 per cent tax rate on real gains. Eligible new build holiday rentals retain the option to elect the 50 per cent discount or the new indexed treatment, whichever is more favourable.

Foreign buyer restrictions and holiday rentals

Foreign persons, including temporary residents, are currently banned from purchasing established dwellings in Australia. The ban runs from 1 April 2025 to 30 June 2029 and was extended in the most recent Federal Budget. New dwellings and developments that increase housing supply are exempt, and there are carve-outs for employee accommodation and certain visa categories.

If you are an Australian citizen or permanent resident looking to buy a holiday rental in a popular tourist area, you may find less competition from offshore buyers during this period, particularly for established apartments and houses. If you are a temporary resident or foreign investor, your options are limited to new builds or exempted categories, and the application fees have tripled.

If you are buying a property in Kingston or anywhere else in the ACT and plan to rent it out as a holiday property, your tax residency and visa status will affect both your ability to buy and the way the ATO treats your rental deductions. Speak to a registered tax agent if you are not an Australian resident for tax purposes, because the withholding and reporting rules are different.

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