How to Purchase a Holiday Home with the Right Loan

Buying a holiday home changes your lending profile because lenders treat second properties differently than your main residence.

Your ability to borrow depends on how you'll use the property. If you're planning to rent it out for part of the year, lenders view projected rental income as a factor in your borrowing capacity. If it's purely for personal use, they assess your ability to service two mortgages from your current income alone. Most buyers we work with who purchase holiday homes fall somewhere between these scenarios, using the property themselves during peak holiday periods while generating rental income during quieter months.

Owner Occupied or Investment: Which Loan Structure Applies

A holiday home loan is classified as an investment loan if you generate any rental income from the property, even if you also use it personally. Lenders typically apply investment loan criteria once rental income exceeds a certain threshold or if the property is made available for rent. If you never rent the property and use it exclusively for personal getaways, you may qualify for owner occupied home loan rates, though you'll need to demonstrate capacity to service both your main residence and the holiday property from your income.

Consider a buyer who purchased a coastal property in Torquay, planning to use it during summer school holidays while renting it out for the remaining ten months. The lender classified this as an investment loan and applied a higher interest rate compared to their primary residence. However, they could claim tax deductions on the mortgage interest, which offset some of the rate difference. The buyer provided evidence of similar properties in the area generating consistent rental returns, which the lender assessed at 80% of projected income to calculate borrowing capacity.

Loan to Value Ratio and Deposit Requirements

Most lenders cap the loan to value ratio (LVR) at 90% for holiday homes, meaning you'll need at least a 10% deposit plus costs. If you're borrowing above 80% LVR, you'll pay Lenders Mortgage Insurance (LMI), which protects the lender if you default. The LMI premium increases substantially on investment properties compared to owner-occupied loans. Some lenders restrict holiday home lending to 80% LVR regardless of your willingness to pay LMI, particularly for properties in regional or seasonal tourist areas where property values can fluctuate.

Your existing property equity can form part or all of your deposit. If you've built equity in your main residence, you may be able to access it without selling. This approach allows you to purchase the holiday home while retaining your current property, though it increases your overall debt position and the lender will assess your ability to service both loans.

Variable Rate, Fixed Rate, or Split Loan Options

Investment loans for holiday homes are available as variable rate, fixed interest rate, or split loan structures. A variable interest rate offers flexibility to make extra repayments without penalty and typically includes an offset account, which can be particularly valuable if rental income sits in the account reducing interest charges during periods between bookings. Fixed interest rate home loans provide certainty over your repayments for a set term, which helps with budgeting if you're managing two mortgages.

A split loan divides your borrowing between fixed and variable portions. In our experience, buyers who rent their holiday home for part of the year often prefer keeping a portion on variable with an offset account linked to where rental income is deposited. This arrangement means rental income directly reduces the interest you pay on the variable portion while the fixed portion provides repayment stability.

Interest Only or Principal and Interest Repayments

Interest only repayments lower your monthly outgoings because you're not reducing the loan amount during the interest only period, which typically runs for one to five years. Many buyers choose this structure initially when purchasing a holiday home because it improves cash flow, particularly if rental income doesn't cover the full mortgage cost. However, you're not building equity during this time, and the loan balance remains unchanged.

Principal and interest repayments cost more each month but steadily reduce what you owe. If your goal is to eventually own the holiday home outright or build equity for future property purchases, this structure serves that aim. Some buyers start with interest only to manage initial cash flow, then switch to principal and interest once rental income stabilises or their financial position improves.

Using Equity and Calculating Borrowing Capacity

Lenders calculate your borrowing capacity by assessing all your income sources against all your commitments, including your existing home loan, credit cards, and living expenses. When you apply for a home loan for a holiday property, they'll also factor in the costs of maintaining two properties, including rates, insurance, and maintenance for the new purchase. If the property generates rental income, lenders typically assess 80% of that income as available to service the loan, accounting for vacancy periods and management costs.

As an example, a buyer with a $600,000 mortgage on their main residence and a household income of $180,000 wanted to purchase a $500,000 holiday home in the Mornington Peninsula. The property was expected to generate $30,000 annually in rental income. The lender assessed $24,000 of that rental income (80%) when calculating borrowing capacity, alongside the buyer's salary. The buyer needed to demonstrate they could service both mortgages even if rental income dropped or vacancy periods extended beyond projections.

Rental Income, Tax Deductions, and Holding Costs

If you rent your holiday home, even occasionally, you can claim tax deductions on mortgage interest, property management fees, maintenance, council rates, and depreciation. These deductions reduce your taxable income, though you'll also need to declare rental income. The Australian Taxation Office has specific rules about how you apportion expenses if you use the property personally for part of the year. Generally, you can only claim deductions for the period the property is genuinely available for rent.

Holding costs add up quickly with a second property. Even if rental income covers most of the mortgage, you'll pay for periods when the property sits vacant, plus ongoing maintenance, insurance, and utilities. Coastal properties, which are popular holiday home locations, often require more frequent maintenance due to salt air and weather exposure. Factor these costs into your borrowing calculations rather than assuming rental income will cover everything.

Applying for Pre-Approval Before You Search

Securing Home Loan pre-approval before you start looking gives you a clear budget and strengthens your position when making an offer. Pre-approval for a holiday home works the same way as for any property purchase, but the lender will specifically assess your capacity to manage two mortgages. This process typically takes a few days to a week, depending on how quickly you can provide supporting documents like payslips, tax returns, and statements for your existing loans and accounts.

Pre-approval also reveals if any lenders restrict lending in your chosen location. Some lenders limit exposure to certain postcodes, particularly in areas heavily dependent on tourism or regions with high vacancy rates. Knowing this before you find a property prevents disappointment if your preferred lender won't finance in that area.

If you're weighing up whether a holiday home fits your financial plans or which loan structure makes sense for how you'll use the property, we can walk through your specific situation and access home loan options from lenders across Australia. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions