The biggest mistake with a holiday rental purchase is assuming the lender will count the rent you expect to earn in full. Lenders apply cautious rules to rental income, and your loan structure and tax position matter just as much as the property itself.
This guide is for Lang Lang locals weighing up a holiday rental, whether along the coast or elsewhere in Victoria. It covers the financing mistakes worth avoiding before you sign a contract.
Does a Lender Count All My Expected Rent?
No. Lenders generally count only part of expected rent, because they allow for periods when the property is empty. APRA's guidance says prudent policies apply a minimum 20 per cent haircut, so no more than 80 per cent of expected rent is counted.
That haircut covers vacancy only. It does not account for management fees, maintenance or other holding costs. Lenders also tend to place less weight on a rental appraisal than on actual rent received. Holiday rentals can have quiet months, so a cautious budget should assume the property will not be booked all year. Whether a lender accepts short-stay income, or a rental appraisal for a new purchase, differs between lenders. That is one reason to speak with a broker before you make an offer.
How Lenders Test Your Borrowing Capacity
Banks must test your ability to repay at a rate at least 3.0 percentage points above the loan's actual rate. This applies to residential investment loans from banks, credit unions and building societies.
As an example, a loan priced at 6.75% p.a. (an illustrative rate only) would be tested at 9.75% p.a. Your existing debts count as well, including the limits on credit cards, which lenders typically assess even when the balance is zero. Reducing unused card limits before you apply can lift your borrowing capacity. Closing a card has its own trade-off, because you lose that line of credit.
APRA also limits how much of a bank's new lending can be at six times income or more. Each bank may lend up to 20 per cent of its new lending at that level, and APRA has noted that this lending is currently well below the limit. The limit applies to the bank's overall lending, not to you personally, and each lender sets its own policies.
Interest Only or Principal and Interest on a Holiday Rental?
Interest only keeps repayments lower for a set period, while principal and interest reduces the loan from the first repayment. Interest only does not increase how much you can borrow.
Lenders assess an interest-only loan on the principal and interest repayments over the remaining term after the interest-only period ends. A 30-year loan with a 5-year interest-only period is assessed over 25 years. The trade-off is that the balance does not fall during the interest-only period, so repayments rise when it ends.
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What Interest-Only Repayments Look Like in Practice
Using an illustrative rate of 6.75% p.a., a $500,000 loan costs about $2,812 a month in interest only. Over 30 years on principal and interest, the repayment is about $3,243 a month.
Consider a buyer who takes a $500,000 interest-only loan for 5 years, then moves to principal and interest. The repayment over the remaining 25 years at the same 6.75% p.a. is about $3,455 a month, which is $212 more than the 30-year figure. Over the first five years, the buyer saves about $431 a month, but still owes the full $500,000 at the end. The lower repayment helps cash flow, yet the shorter repayment period is what lifts the later cost. Use a repayment calculator with your own figures, and keep in mind that lenders set their own interest-only terms and rates.
How Much Deposit Do You Need for a Holiday Rental?
A deposit of 20 per cent of the purchase price usually avoids Lenders Mortgage Insurance, but that is lender policy, not a legal rule. Borrowing above 80 per cent LVR generally needs both lender and LMI insurer approval.
LMI is paid by you and is calculated on a sliding scale based on the loan amount and LVR. Stamp duty may also apply to the premium in some states. If you own a home in Lang Lang with equity, you may be able to use part of it as the deposit. The trade-off is that your home becomes security for the investment debt, so a fall in value or a rise in repayments puts more at risk.
Interest on funds borrowed against your home is only deductible to the extent the money is used for the investment. Money drawn for private use is not deductible. Offset account balances do not reduce the loan amount for LVR purposes, though they do reduce the interest charged.
Tax Rules for Holiday Rental Losses Have Changed
From the 2027-28 income year, net rental losses on established residential properties bought after 7:30pm AEST on 12 May 2026 can only be deducted against other residential property income. Losses on eligible new builds can still be deducted against all income.
Properties held at that time, including those under contract, keep full deductibility until sold. Properties bought between 12 May 2026 and 30 June 2027 can be negatively geared under the current rules until 30 June 2027 only. Interest on a rental loan remains deductible to the extent the property is rented or genuinely available for rent. Only the interest part of a principal and interest repayment is deductible, not the principal.
Capital gains rules also change from 1 July 2027, when the 50 per cent discount is replaced by cost base indexation and a 30 per cent minimum tax rate on gains accruing from that date. These rules are detailed, so speak with your accountant before you buy.
Matching the Loan to the Property and Your Plan
The loan should suit how you plan to use the property, including whether it is a rental, a new build or something you also stay in yourself. Interest is only deductible for the period the property is rented or genuinely available for rent.
If you plan personal stays, your lender and accountant should both know. Where there is doubt about whether a loan is for owner-occupation or investment, lenders must treat it as an investment loan. A purchase with a body corporate adds levies to your running costs, which affects your cash flow, and lenders may take such costs into account. If you already have loans, a loan health check or refinancing review may release cash flow before you commit to more debt. For a wider view of finance for rental purchases, see our investment loans page.
A broker can compare options from lenders on our panel and explain the cost and risk of each structure. If you want to talk to a local team, see our Lang Lang mortgage broker page.
Call one of our team or book an appointment at a time that works for you, and we will test your holiday rental plan against real lender rules before you make an offer.
Frequently Asked Questions
Do lenders count all expected rent on a holiday rental?
No. APRA's guidance says prudent lenders count no more than 80 per cent of expected rent to allow for vacancy. Each lender sets its own rules on short-stay income and rental appraisals.
Does an interest-only loan let me borrow more?
No. Lenders assess interest-only loans on principal and interest repayments over the remaining term after the interest-only period, so borrowing capacity does not rise. Repayments also increase when the interest-only period ends.
Do I need a 20 per cent deposit for an investment property?
Lenders Mortgage Insurance is generally required above 80 per cent LVR, but this is lender policy rather than a legal limit. Borrowing above that level needs approval from both the lender and the insurer.
Has negative gearing changed for new purchases?
From the 2027-28 income year, losses on established residential properties bought after 12 May 2026 can only offset other residential property income. Eligible new builds are treated differently, so check with your accountant.
