The Pros and Cons of Holiday Rental Property Loans

Holiday rental properties sit in a different lending category to standard residential investments. Lenders assess them more cautiously because vacancy rates tend to spike outside peak season, and borrowing capacity often shrinks when rental income is discounted or excluded entirely.

Understanding how banks treat holiday rental income changes the numbers before you sign a contract. From 1 February this year, each lender can approve no more than 20 per cent of new investor loans at a debt-to-income ratio of 6 times or greater, which tightens capacity further when your rental income is shaded or ignored. That means your salary and other income carry more weight, and the property's earning potential carries less.

How Lenders Assess Holiday Rental Income

Most lenders either exclude holiday rental income completely or shade it by 20 to 30 per cent when calculating serviceability. Unlike long-term residential tenancies where a signed lease provides certainty, holiday bookings fluctuate with school holidays, local events and seasonal demand. A coastal property might generate solid income over summer and Easter, then sit empty for weeks during winter.

Consider a buyer looking at a two-bedroom unit on the Central Coast as a holiday rental. The property generates around $45,000 in peak season but closer to $15,000 in the quieter months, averaging $30,000 annually. One lender might accept 70 per cent of that figure for serviceability, another might accept none until the property has a 12-month rental history. If the buyer earns $120,000 and needs to borrow $650,000, the difference between a lender recognising $21,000 of rental income and recognising zero can decide whether the loan is approved.

Investment property finance is assessed at a serviceability buffer of at least 3 percentage points above the actual loan rate, so even with rental income included, you need enough salary to cover repayments at a notional rate well above what you will actually pay. That buffer has been in place since October 2021 and was maintained through the most recent regulatory update in May this year.

Interest Only or Principal and Interest

An interest only investment loan keeps repayments lower during the early years, which can improve cash flow when rental income is variable. The structure is common for property investors building a portfolio, but it does push the loan balance out further and increases the total interest paid over the life of the loan.

Interest only periods typically run for one to five years, after which the loan reverts to principal and interest unless you negotiate an extension. Banks apply higher risk weighting to interest only loans under the capital adequacy rules that took effect in January 2023, and that flows through to slightly higher rates or stricter eligibility in some cases.

For a holiday rental where income is seasonal and not guaranteed year-round, paying down the principal from the outset can reduce your exposure if bookings dry up or the property market softens. Principal and interest also builds equity faster, which matters if you plan to leverage that equity for another purchase down the track.

The Pros: Tax Treatment and Portfolio Growth

Holiday rental properties are treated as residential investment properties for tax purposes, so interest, council rates, insurance, property management fees, repairs and depreciation remain deductible for the period the property is rented or genuinely available for rent. Body corporate fees are also claimable where applicable.

Under the negative gearing rules that took effect from 1 July 2027, properties purchased after 7:30pm on 12 May 2026 can only offset rental losses against other residential rental income or carry the losses forward to offset future rental income or capital gains. Losses cannot be offset against salary or wages. Properties purchased before that date continue under the previous rules, where losses can be deducted against other income until the property is sold.

If you are buying a holiday rental now and the property runs at a loss in the first few years, those losses are quarantined unless you own other rental properties generating positive income. The change reduces the immediate tax benefit compared to investments made before May last year, but it does not remove deductibility altogether. Investors holding properties long term still benefit from deductions and from any capital growth when the property is eventually sold.

From a portfolio perspective, holiday rentals in high-demand locations can generate stronger gross returns than traditional long-term leases, particularly in areas with limited short-stay accommodation and strong tourism fundamentals. They also give you the option to use the property yourself during quieter periods without breaching any loan terms, provided the property remains genuinely available for rent when you are not occupying it.

The Cons: Higher Deposits and Lenders Mortgage Insurance

Most lenders will require a deposit of at least 20 per cent for an investment property loan, pushing the loan to value ratio down to 80 per cent or below. Some lenders will go higher with Lenders Mortgage Insurance, but LMI premiums on investment loans are calculated on a steeper scale than owner-occupier loans, and stamp duty may apply to the premium depending on which state the property is in.

For a holiday rental property where rental income is shaded or excluded, borrowing at an LVR above 80 per cent becomes harder because serviceability tightens and the lender's risk increases. A buyer borrowing 90 per cent on a $700,000 property would need to service a $630,000 loan primarily from salary, pass the debt-to-income test, and pay an LMI premium that could sit anywhere from $15,000 to $25,000 depending on the lender and the buyer's circumstances.

That premium can be capitalised into the loan, but it increases the total amount borrowed and the ongoing repayments. On a property expected to sit vacant for part of the year, the additional cost can tip the investment into negative territory faster than a standard residential rental.

Variable Rate or Fixed Rate for Holiday Rentals

A variable interest rate gives you flexibility to make extra repayments, redraw funds if needed, and refinance without break costs. For a holiday rental where income fluctuates and you might want to pay down the loan faster during strong booking periods, that flexibility can be valuable.

Fixed rates lock in your repayment amount for a set term, which can provide certainty if you are managing cash flow around seasonal income. The trade-off is that if rates fall or your circumstances change, exiting a fixed loan early usually incurs break costs calculated on the difference between your fixed rate and the lender's current wholesale funding rate.

Some investors split the loan between variable and fixed, which balances flexibility with certainty. The structure depends on your risk tolerance and how much variability you are comfortable managing in your repayments.

Location Matters for Lender Appetite

Properties in established holiday destinations with year-round appeal tend to get better serviceability treatment than properties in locations with short, concentrated peak seasons. A unit in Manly or a house in the Blue Mountains will generally be viewed more favourably than a property in a town that only fills during one or two school holiday periods.

Lenders look at rental appraisals, local vacancy rates, and whether the area supports a mix of short-stay and long-term rental options. If the property can be switched to a traditional lease during weaker periods, that adds flexibility and can improve your borrowing position. If the property is zoned or located in a way that limits it to short-stay use only, some lenders will decline the application outright or require a larger deposit.

Sydney buyers looking at holiday rentals in nearby coastal areas or regional centres should confirm the lender's appetite for the specific location before committing to a contract. Not all lenders treat the Central Coast the same as the South Coast, and not all will accept rental income from properties in smaller towns or tourism-dependent regions.

Calling one of our team or booking an appointment at a time that works for you means you can compare investment loan options from banks and lenders across Australia, confirm how each lender will treat holiday rental income, and structure your finance to match your investment strategy and cash flow. We work with Sydney investors purchasing holiday rentals in New South Wales and beyond, and we will walk you through the serviceability rules, deposit requirements and rate options that apply to your situation.

Frequently Asked Questions