Smart ways to finance a holiday rental investment

Financing a holiday rental property requires a different approach to borrowing than an owner-occupied purchase or a standard long-term rental investment.

The income profile varies throughout the year, vacancy periods are typically higher, and lenders assess serviceability based on adjusted rental income that accounts for seasonal fluctuations. Add to this the recent changes to negative gearing and capital gains tax rules taking effect from July 2027, and buyers need to be clear on both the immediate financing structure and the longer-term tax position before they commit.

How lenders assess holiday rental income

Lenders discount projected holiday rental income to account for vacancy periods and seasonal variation. Most apply a reduction of 20 to 30 per cent to the gross rental estimate you provide, though some adjust as high as 40 per cent depending on the location and whether you can demonstrate a consistent booking history.

If you're purchasing an established holiday rental with an existing income record, bring at least 12 months of booking data, occupancy rates, and a statement from the property manager. Lenders will use that track record rather than relying on projections. If you're buying a property that hasn't been used as a holiday rental before, expect the lender to apply the higher end of the discount range and scrutinise your borrowing capacity more closely.

Consider a buyer from Beaumaris purchasing a coastal property near a regional tourism hub. The property advertises potential gross rental income around $60,000 per year, but with no booking history the lender applies a 30 per cent discount and assesses serviceability on $42,000. That reduction affects how much you can borrow, so factoring it in early avoids disappointment later. For Beaumaris residents already holding a home loan, understanding your existing borrowing capacity before approaching lenders will clarify how much additional debt you can service once the rental discount is applied.

Interest-only or principal and interest repayments

Most holiday rental buyers choose interest-only repayments during the initial loan period to preserve cash flow. Interest-only terms typically run for one to five years, after which the loan reverts to principal and interest unless you refinance or negotiate an extension.

This structure works when rental income is unpredictable or seasonal and you want to keep monthly commitments lower. The interest portion is generally deductible against rental income, provided the property is genuinely available for rent and not reserved exclusively for personal use. If you block out extended periods for private holidays without making the property available to paying guests, the ATO may disallow part of the interest deduction.

Principal and interest repayments reduce the loan balance over time and can be the right choice if you expect consistent rental income or want to build equity faster. Some buyers split the loan, keeping a portion on interest-only and the rest on principal and interest, which balances cash flow with debt reduction. It's worth mapping out both scenarios with actual repayment figures based on your deposit size and the property value before deciding.

Fixed or variable rates for holiday rental properties

You can fix all or part of an investment loan, though most lenders restrict interest-only terms on fixed rate products or charge a premium for the combination. Variable rates offer more flexibility if you want to make extra repayments or refinance without break costs, and they often come with offset accounts that can reduce the interest charged on the outstanding balance.

Fixed rates provide certainty, which can help if you're managing multiple loans or want to lock in a rate you believe is favourable. The decision depends on your broader financial position and whether you're willing to trade flexibility for predictability. Many buyers take a split approach, fixing part of the loan to stabilise a portion of the repayments and leaving the rest variable to retain flexibility.

If you hold other properties or are considering expanding your property portfolio, a variable rate structure on the holiday rental may make it simpler to release equity or refinance later without triggering break costs on a fixed loan.

Deposit and loan to value ratio requirements

Most lenders will lend up to 80 per cent of the property value for an investment purchase without requiring Lenders Mortgage Insurance. Some will go to 90 per cent, but you'll pay LMI on the amount above 80 per cent, and the premium is typically higher for investment lending than for owner-occupied loans.

A 20 per cent deposit also improves your interest rate, as lenders usually reserve their most competitive pricing for loans at or below 80 per cent LVR. If you're using equity from your Beaumaris home to fund the deposit, the lender will calculate usable equity based on the current valuation and the outstanding loan balance. Not all of your equity will be available, as lenders cap the combined borrowing across all secured properties at 80 per cent of the total value.

For residents refinancing or releasing equity to fund a holiday rental deposit, speaking with a mortgage broker in Beaumaris can clarify exactly how much equity you can access and what the most suitable loan structure looks like across both properties.

Negative gearing and the July 2027 tax changes

Under current rules, if your rental expenses including interest, property management fees, council rates and maintenance exceed the rental income, you can offset that loss against your other taxable income such as salary or business income. This is negative gearing, and it reduces your overall tax liability.

From 1 July 2027, properties purchased on or after 7:30pm AEST on 12 May 2026 will no longer be able to offset rental losses against non-rental income unless the property qualifies as an eligible new build. Losses will be quarantined and can only be offset against other residential rental income or carried forward to offset future rental income or capital gains on residential property.

For a Beaumaris buyer purchasing an established holiday rental before 30 June 2027, there's a transitional window where you can still use negative gearing under the old rules until 30 June 2027, after which the quarantine applies. If you're purchasing after that date, the tax benefit of negative gearing is effectively removed unless you're buying a property that increases the housing supply, such as a new build on vacant land or a development that increases the number of dwellings on the site.

This changes the cash flow equation. If you were relying on the tax refund from a negatively geared property to subsidise holding costs, that benefit disappears for most established holiday rentals acquired recently. It doesn't make the investment unviable, but it does mean the property needs to generate enough rental income or capital growth to justify the holding costs without the tax offset.

Capital gains tax indexation from July 2027

The 50 per cent capital gains discount for individuals is being replaced with cost base indexation and a minimum 30 per cent tax rate on real capital gains, effective 1 July 2027. The change applies only to gains accrued after that date, so any growth in value up to 30 June 2027 will still be taxed under the current 50 per cent discount method when you eventually sell.

For eligible new build properties, you can elect to use either the 50 per cent discount or the indexation method with the 30 per cent minimum rate, whichever is more favourable at the time of sale. Most established holiday rental purchases won't qualify for that election, so understanding the timing of your purchase and the split between pre-July 2027 and post-July 2027 gains becomes relevant if you're holding the property long term.

Indexation adjusts your cost base each year in line with the Consumer Price Index, which can reduce the taxable gain compared to a flat 50 per cent discount in a high-inflation environment, but the 30 per cent minimum rate may offset that benefit depending on your marginal tax rate.

Structuring the loan to suit personal use and rental income

If you plan to use the holiday rental yourself for part of the year, the ATO applies an apportionment to deductible expenses including interest. The deduction is based on the proportion of time the property is genuinely available for rent versus the time it's used privately or unavailable.

Lenders don't typically adjust the loan structure based on your intended personal use, but you need to be clear on the income side. If you're blocking out school holidays and peak periods for family use, that reduces the number of weeks the property is genuinely available for rent, which in turn affects both the rental income you can claim and the amount lenders will assess for serviceability.

Borrowing the right amount upfront means being realistic about how often the property will be rented and what your actual after-tax holding costs will be once apportionment and the new tax rules are factored in. Running the numbers with both scenarios - full rental availability versus partial personal use - gives you a clearer picture of whether the investment fits your cash flow and long-term goals.

Choosing the right lender and loan product

Not all lenders treat holiday rental income the same way. Some will only lend on properties in established tourism areas with a strong rental track record, while others take a more flexible view if you can demonstrate demand through comparable listings or a property manager's assessment.

Access to a wide range of investment loan options is particularly important for holiday rental purchases, as the differences in how lenders assess rental income, apply discounts, and price the loan can have a significant impact on both your borrowing capacity and your ongoing repayments. A lender that applies a 20 per cent discount to holiday rental income may allow you to borrow $50,000 to $80,000 more than a lender applying a 40 per cent discount, depending on the property and your other income.

Once you have a clear view of the property, the expected rental income, and your intended use, arranging finance before you make an offer gives you certainty on price and avoids the risk of conditional approval falling through due to serviceability issues that could have been addressed earlier.

Call one of our team or book an appointment at a time that works for you to discuss how an investment loan can be structured for a holiday rental property and what the recent tax changes mean for your specific situation.

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