Top tips to finance a holiday rental property

Why Holiday Rentals Need Different Loan Structuring

Holiday rental properties require a different approach to loan structuring than standard residential investments because lenders assess them on intermittent income rather than continuous tenancy. Most lenders cap the rental income they'll recognise at 70 to 80 per cent of projected holiday bookings, which directly affects how much you can borrow and whether the loan services comfortably during low-season gaps.

Consider a Defence member purchasing a two-bedroom unit in a coastal location as a holiday rental. The property generates strong rental returns during summer and school holidays but sits vacant for several weeks across winter. The lender assesses serviceability by applying a shading rate to the projected annual rental income, which means the borrower needs to demonstrate they can service the loan primarily from their salary during periods when the property earns nothing. That makes the borrowing calculation more conservative than a standard investment loan.

Military personnel often have stable employment and regular income, which works in your favour when a lender is weighing up intermittent rental income against loan repayments. If you're deployed or posted interstate, you'll also need to show that property management arrangements are in place, as most lenders require professional management for holiday rentals rather than owner occupation between bookings.

How Lenders Assess Rental Income for Holiday Properties

Lenders treating a property as a holiday rental will typically ask for evidence of projected income, such as a property management appraisal or comparable booking data from the local area. They then apply a shading percentage, often 70 to 80 per cent, to account for vacancy and seasonality. The shaded figure is what's used in the serviceability assessment, not the gross projected income.

In practice, if a property management agency estimates annual rental income of $40,000, the lender may assess serviceability on $28,000 to $32,000. The difference needs to be covered by your salary and any other income sources. That calculation also sits within the serviceability buffer, which requires you to demonstrate capacity to service the loan at an interest rate 3.0 percentage points above the actual loan rate.

From February this year, lenders also apply a debt-to-income limit, capping new investor loans at a DTI ratio of six times your gross income for no more than 20 per cent of their investor lending book. If your total borrowing, including your owner-occupied home loan and the new investment loan, exceeds six times your annual income, you may need a larger deposit or a lender willing to use part of their allowance for higher DTI lending. Military personnel with allowances and stable income streams are generally well positioned, but it's worth running the numbers with a broker before you make an offer.

Interest-Only Repayments and Cash Flow Management

Interest-only repayments are commonly used for investment loans because they reduce the monthly outgoing and allow you to direct more of your salary toward other goals or to cover holding costs during vacancy periods. An interest-only period typically runs for one to five years, after which the loan reverts to principal and interest unless you negotiate an extension or refinance.

For a holiday rental with seasonal income, interest-only repayments mean you're not forced to meet higher principal-and-interest payments during months when the property sits empty. The trade-off is that you're not reducing the loan balance during the interest-only period, so the total interest cost over the life of the loan will be higher unless you make voluntary repayments when cash flow allows.

If you're posted overseas or deployed for extended periods, interest-only repayments also reduce the risk that you'll need to access offset or redraw funds to meet loan commitments. You can structure the loan with an offset account linked to your salary account, so any surplus funds reduce the interest charged without being locked into the loan.

Fixed or Variable Rates for Holiday Rental Loans

Deciding between a fixed rate and a variable rate depends on how much certainty you want over repayments and whether you're prepared to trade flexibility for rate protection. A fixed rate locks in your repayment amount for a set period, typically one to five years, which can help with budgeting when rental income fluctuates. A variable rate moves with market conditions and usually offers more flexibility, including offset accounts and the ability to make extra repayments without penalty.

Military personnel who know they'll be posted or deployed in the next few years may prefer a variable rate with an offset account, as it allows you to park your salary and allowances in offset during periods when you're not drawing on them, reducing the interest charged. Fixed rates generally don't offer offset functionality, though some lenders provide a partial offset or allow you to fix a portion of the loan and leave the rest variable.

Rate discounts on investment loans are typically smaller than those available for owner-occupied loans, reflecting the higher risk weight that lenders assign to investor lending under the prudential framework. Depending on your deposit size and the lender, you may see a rate that's 0.2 to 0.5 percentage points higher than an equivalent owner-occupied loan.

Negative Gearing and the 2027 Rule Change

Negative gearing allows you to deduct the shortfall between rental income and holding costs, including loan interest, against your other income such as your Defence salary. For holiday rentals, that shortfall can be significant during low-season months when the property earns little or nothing.

If you purchase an established holiday rental property after 12 May 2026 and before 1 July 2027, you can deduct losses against your salary until 30 June 2027. From the 2027-28 income year, losses on that property can only be offset against income from other residential properties, not against salary or wages. Unused losses carry forward and can be used in future years when the property generates a gain or when you sell.

Properties that qualify as eligible new builds are exempt from the restriction. An eligible new build includes a dwelling constructed on vacant land or a development that increases the total number of dwellings on the site. A renovation or knock-down rebuild that doesn't increase dwelling numbers doesn't qualify. If you're considering a new build holiday rental in a growth area, you retain full negative gearing and can choose between the existing 50 per cent capital gains tax discount or the new indexed cost base treatment when you sell.

What Deposit and LMI Costs to Expect

Most lenders require a minimum 10 per cent genuine savings deposit for an investment property, though a 20 per cent deposit will avoid Lenders Mortgage Insurance and give you access to better rates. If your LVR is above 80 per cent, the lender will require LMI, which is a one-off premium calculated on the loan amount and LVR. The premium is capitalised into the loan or paid upfront, and in some states stamp duty applies to the premium itself.

Military personnel may have access to LMI waivers or reduced LMI through certain lenders, particularly if you're in a recognised profession or meet specific income and employment criteria. It's worth discussing LMI waivers for professionals with a broker, as the waiver can reduce upfront costs significantly and allow you to retain capital for holding costs or further investment.

Genuine savings are defined as funds held in your account for at least three consecutive months. Bonuses, allowances and sale proceeds from another property generally count as genuine savings, but gifted funds or borrowed funds do not. If you're using equity from your home to fund the deposit, the lender will assess that as leveraged equity rather than cash savings, which may affect the LVR calculation and serviceability.

Managing Vacancy Rates and Holding Costs

Vacancy rates for holiday rentals vary by location and season, and lenders account for that by shading the income they'll recognise. You need to budget for periods when the property earns nothing, which means holding enough cash or offset balance to cover loan repayments, council rates, insurance, body corporate fees if applicable, and property management costs.

Property management fees for holiday rentals are typically higher than for long-term residential tenancies, often 15 to 25 per cent of rental income, because the manager is handling bookings, guest communication, cleaning and maintenance between stays. Those fees are fully deductible, as are other ongoing costs such as repairs, insurance and depreciation on fixtures and fittings.

If you're deployed or posted away from the property, you'll also need to factor in the cost of tradespeople or contractors to handle maintenance issues that arise between bookings. Most lenders require you to have professional management in place for a holiday rental, so owner management is generally not an option if you're applying for finance as an investment property.

Deductions You Can Claim on a Holiday Rental

Interest on the investment loan is deductible for the period the property is rented or genuinely available for rent. If you use the property for personal holidays, you need to apportion the interest and other expenses based on the number of days it was available for rent versus the days you used it privately.

Other claimable expenses include council rates, water rates, insurance, property management fees, cleaning, repairs and maintenance, depreciation on the building and fixtures, and body corporate fees if the property is in a strata scheme. Advertising and booking platform fees are also deductible. Capital improvements such as renovations or extensions are not immediately deductible but are added to the cost base for capital gains tax purposes when you sell.

If you travel to the property for maintenance or to meet with the property manager, travel costs are generally not deductible unless the primary purpose of the trip is income-producing activity. The Australian Taxation Office applies strict rules to holiday rental deductions, particularly where the owner also uses the property personally, so keeping detailed records of rental days versus private use is important.

Call one of our team or book an appointment at a time that works for you. We can help you structure an investment loan that fits your posting cycle, compare lenders who understand holiday rental income, and connect you with specialists who can advise on the tax treatment of your property.

Frequently Asked Questions