Avoid These 7 Mistakes When Financing a Holiday Rental

Buying a holiday rental property feels like the kind of goal that makes sense when you've built some equity in your Bayside home and want that equity working harder.

The property doubles as somewhere your family can use a few weeks each year, plus it generates rental income the rest of the time. But the lending structure, tax treatment and cash flow assumptions for a holiday rental work differently to a standard residential investment, and getting those details wrong can turn a lifestyle asset into a financial headache.

Treating Holiday Rental Income the Same as Long-Term Rental Income

Lenders assess holiday rental income more conservatively than long-term residential rent because occupancy is less predictable. Most lenders will shade the declared rental income by 20 to 30 per cent to account for vacancy periods, seasonal gaps and the cost of management and marketing. If you're looking at a coastal property that advertises $50,000 annual rental potential, the lender might only recognise $35,000 of that figure when calculating your borrowing capacity. That difference matters when you're already stretching to cover a second property.

Consider a buyer who owns a home in Sandringham with $400,000 in usable equity and wants to purchase a holiday unit on the Mornington Peninsula. They assume the rental income will cover most of the loan repayments, but the lender's shaded figure means they need to demonstrate capacity to service a larger shortfall from their own income. If that shortfall pushes their total debt-to-income ratio above six times their household earnings, they may fall outside the DTI lending limit that applies to investment loans from February this year. The outcome is either a smaller loan amount, a larger deposit from savings, or a different property altogether.

Underestimating the Upfront Costs Beyond the Deposit

Holiday rental properties in high-demand coastal areas often come furnished or require furnishing before the first guest arrives. Stamp duty, legal fees and lenders mortgage insurance are the same as any investment purchase, but you also need to budget for furniture, appliances, linen, and sometimes council permits or body corporate approvals for short-term letting. In some coastal towns, body corporate rules explicitly restrict short-term rental activity, and if you miss that detail before settlement, the entire investment case falls apart.

An investor deposit for a holiday rental is typically 20 per cent to avoid LMI, though some lenders will go to 90 per cent LVR if you're prepared to pay the premium. Stamp duty in Victoria on a $600,000 investment property is roughly $31,000. Add conveyancing, furnishings and a buffer for initial vacancies, and you're looking at another $20,000 to $30,000 on top of the deposit. If you're releasing equity from your Bayside home to fund the purchase, those costs need to be included in the total drawdown, not treated as an afterthought once settlement is confirmed.

Choosing the Wrong Loan Structure for Your Tax Position

Most investors default to interest-only repayments on investment loans because it maximises the interest deduction and keeps monthly repayments lower. That approach works when the property is negatively geared and you want to preserve cash flow. But if your holiday rental generates strong income during peak season and you're in a high marginal tax bracket, paying down principal while interest rates are manageable can reduce your long-term exposure and build equity faster.

Fixed rates give you certainty, but they remove flexibility if you want to make extra repayments or sell within the fixed term. Variable rates allow offset accounts, which can be useful if you're holding rental income in the offset to reduce interest while keeping the funds accessible for maintenance or marketing costs. Some lenders offer split loans so you can fix a portion for stability and leave the rest variable. Your choice should be led by your tax position, cash flow and how long you intend to hold the property, not by whichever rate looks lowest today.

Ignoring the New Negative Gearing Rules if You're Buying After May Last Year

If you purchased your holiday rental property, or exchanged contracts, after 7:30pm on 12 May 2026, and it's an established dwelling rather than a new build, the negative gearing rules changed. Losses from that property can only be offset against income from other residential properties, including capital gains when you eventually sell. You can't offset the loss against your salary anymore, which means the after-tax cost of holding the property is higher than it was for investors who bought before that date.

New builds are exempt from the rule, so if you're buying a newly constructed unit in a coastal development, full negative gearing still applies. The definition of a new build includes dwellings on previously vacant land and properties where the dwelling count increased, but it excludes knock-down rebuilds that don't add supply. If a developer occupied the new unit for more than 12 months before selling it to you, it's no longer considered a new build for tax purposes.

Assuming You Can Claim Every Expense Because It's an Investment

Interest, rates, insurance, property management, repairs and depreciation are all claimable when the property is rented or genuinely available for rent. But the weeks your own family stays in the property are considered private use, and you need to apportion your deductions accordingly. If you use the holiday house for four weeks each year, roughly 8 per cent of your annual expenses are not deductible. The ATO has been clear that claiming 100 per cent of costs when you're also using the property personally will trigger a review.

Repairs are deductible in the year they occur, but improvements that add value, such as renovating the kitchen or adding a deck, need to be depreciated over time. Keep detailed records of which expenses relate to genuine maintenance and which are capital works, because the distinction affects your tax return and your cost base when you sell.

Overlooking the Capital Gains Tax Changes From July Next Year

For any portion of your capital gain that accrues from 1 July 2027 onward, the 50 per cent discount is replaced by cost base indexation and a 30 per cent minimum tax rate on real gains. If you buy a holiday rental now and sell it in a decade, the gain will be split into a pre-July 2027 portion taxed under the old rules and a post-July 2027 portion taxed under the new rules. You'll either need a market valuation as at 1 July 2027 or you can use an ATO apportionment formula.

If you bought an eligible new build, you'll have the option to choose between the old discount method and the new indexed method at the time you sell, which gives you more flexibility depending on inflation and your marginal rate at exit. Established properties purchased after May last year don't get that choice. The indexed method is better if inflation is high and your marginal rate is above 30 per cent. If your rate is below 30 per cent, the minimum rate might push your effective tax higher than it would have been under the discount.

Failing to Stress Test Your Cash Flow Against a Sustained Vacancy Period

Holiday rental income is seasonal. A coastal property might be fully booked from December through February and over Easter, then sit empty for weeks during winter. If your loan serviceability depends on consistent rental income and you haven't budgeted for those gaps, you'll be covering the shortfall from your own cash flow at the exact time other family expenses are highest.

Lenders apply a serviceability buffer, meaning they assess your ability to repay the loan at a rate 3 percentage points above the actual loan rate. That buffer is there to protect you as much as the lender, but it only works if your assumptions about rental income are realistic. If you're considering a holiday rental in a location you don't know well, speak to local property managers about actual occupancy rates and average nightly returns, not the figures in the sales brochure. Properties in towns with strong local tourism infrastructure and year-round appeal will always outperform those that rely on a six-week summer season.

If you've been thinking about adding a holiday rental to your portfolio, or you want to review whether your current home loan structure in Bayside is set up to support a second property purchase, call one of our team or book an appointment at a time that works for you. We'll walk through your equity position, borrowing capacity and loan structure options so you know exactly where you stand before you start looking at properties.

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