Lenders treat holiday rental properties differently from long-term rentals.
A holiday rental in Byron Bay or the Southern Highlands will typically require a larger deposit and attract a higher interest rate than a residential investment in Double Bay, because lenders view intermittent short-stay income as higher risk than a fixed twelve-month lease. The tax treatment also changed substantially in mid-2026, and the rules that apply depend on whether you settle before or after 1 July 2027.
Why lenders charge more for holiday rental finance
Lenders assess serviceability on holiday properties using a discounted rental income figure, often applying a 20 to 30 per cent reduction to the gross income you forecast. A beachside cottage in Jervis Bay that generates $60,000 in annual bookings might only be credited at $42,000 for serviceability purposes, and some lenders will apply vacancy assumptions of 40 per cent or more depending on location and seasonal demand.
Most lenders also cap the loan to value ratio at 70 or 80 per cent for holiday rentals, which means you will need a deposit of at least 20 to 30 per cent of the purchase price plus settlement costs. Lenders Mortgage Insurance is typically not available above 80 per cent LVR for this asset class, so if you are relying on equity release from your Double Bay home to fund the deposit, the amount you can access will determine the price range you can consider.
Interest only or principal and interest for a holiday rental
Interest only loans remain available for holiday rental properties and are commonly used to preserve cash flow during the establishment phase. Repayments on a $700,000 interest only loan at a current investor variable rate will sit around $3,600 per month, whereas principal and interest repayments on the same amount would be closer to $4,800.
The choice depends on your intended holding period and whether you plan to use surplus rental income to reduce the principal or prefer to direct it toward other investments. If the property is genuinely part of a long-term wealth building strategy, principal and interest can reduce your exposure over time and lower the total interest cost, but interest only offers flexibility in months when bookings are lower than forecast.
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Negative gearing changes from July 2027
Properties purchased after 7:30pm on 12 May 2026 will be subject to quarantined loss rules from 1 July 2027 unless the dwelling qualifies as an eligible new build. Rental losses on these properties can only be offset against other residential rental income or carried forward to offset future rental income or capital gains from residential property. They cannot reduce your salary or other assessable income.
A holiday rental in a regional town that returns $50,000 in gross income but incurs $65,000 in interest, body corporate fees, council rates, management fees and other claimable expenses would produce a $15,000 annual loss. Under the old rules, that loss would reduce your taxable income from other sources. From 1 July 2027, it will only reduce tax on income from other residential rental properties you own, or be carried forward to reduce tax on a future sale.
Properties held before the 12 May 2026 announcement, including those under contract at that time, retain access to the existing negative gearing rules until sold. If you are considering a holiday rental as part of expanding your property investment portfolio, the timing of your purchase will determine which tax rules apply for the life of your ownership.
How vacancy rates affect borrowing capacity
A holiday rental in a coastal location with strong summer demand but limited off-season appeal will be assessed more conservatively than a property in a year-round destination. Lenders often request a rental appraisal from a local short-stay management agency before approving the loan, and the figures in that appraisal will be further discounted during serviceability calculations.
Consider a two-bedroom apartment in Noosa that achieves 65 per cent occupancy at an average nightly rate of $280. Gross annual income would be around $66,000, but the lender may only credit $46,000 after applying a vacancy buffer and a serviceability haircut. If your borrowing capacity is already constrained by existing commitments, the discounted income may limit the investment loan amount you can access, even if the actual returns are higher in practice.
Variable or fixed rates for holiday rental loans
Most investors financing a holiday rental choose a variable rate to retain flexibility, particularly if they plan to make lump sum payments from periodic rental income or if they expect to sell within a few years. Fixed rates are available, but break costs can be substantial if you need to exit the loan early due to a change in personal circumstances or a shift in the holiday rental market.
Some lenders offer split loans, where a portion of the debt is fixed and the remainder stays variable. This structure can provide some rate certainty while preserving the ability to make extra repayments on the variable portion without penalty. Rate discounts on holiday rental loans are typically smaller than those available for standard residential investment properties, and not all lenders offer the same investment loan features across both categories.
Claimable expenses and capital gains tax from July 2027
Interest on the loan, property management fees, council rates, water charges, insurance, repairs and maintenance, and depreciation on fixtures and fittings remain deductible against the rental income the property generates. Body corporate fees for a strata unit and cleaning costs between bookings are also claimable.
From 1 July 2027, capital gains on properties purchased after 12 May 2026 will be taxed under a new regime that replaces the 50 per cent discount with cost base indexation and a minimum 30 per cent tax rate on real gains. Gains that accrued before 1 July 2027 will continue to be taxed under the existing rules, so only the appreciation occurring after that date will be subject to the new calculation. Eligible new build holiday rentals can elect between the old discount method and the new indexed method, but most established holiday properties will not qualify.
When to speak to a broker before you start searching
Getting clarity on your borrowing capacity before you search will prevent you from wasting time on properties outside your price range or in locations that your preferred lenders will not support. Some lenders exclude certain postcodes or property types entirely, and others impose additional conditions on short-stay rentals in oversupplied markets.
If you are planning to use equity from your Double Bay home to fund the deposit, the usable amount will depend on your existing loan balance, the current valuation, and the maximum LVR the lender will support across both properties. Investment loan refinancing of your current home loan may also be required if the existing lender does not offer competitive investor rates or does not lend for holiday rentals.
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Frequently Asked Questions
Do lenders treat holiday rental properties the same as long-term investment properties?
No, lenders apply stricter serviceability assessments to holiday rentals, discounting the rental income by 20 to 30 per cent and often capping the loan to value ratio at 70 or 80 per cent. Interest rates are also typically higher than standard residential investment loans.
Can I still negatively gear a holiday rental property purchased now?
Properties purchased after 12 May 2026 will have rental losses quarantined from 1 July 2027, meaning losses can only offset other residential rental income or be carried forward. Properties held before that date retain access to existing negative gearing rules.
What deposit do I need for a holiday rental property loan?
Most lenders require a deposit of at least 20 to 30 per cent of the purchase price for holiday rental properties. Lenders Mortgage Insurance is typically not available above 80 per cent LVR for this asset class.
Should I choose interest only or principal and interest repayments for a holiday rental loan?
Interest only loans preserve cash flow during the establishment phase and are common for holiday rentals. Principal and interest repayments reduce your loan balance over time and lower total interest costs, but offer less flexibility in low-occupancy months.
How do lenders assess rental income from a holiday property?
Lenders typically request a rental appraisal from a local short-stay management agency, then apply a discount of 20 to 30 per cent to the gross income figure. High vacancy assumptions are common, particularly for properties with strong seasonal variation.
