Smart ways to approach a holiday home loan

A holiday home loan is treated as an investment loan for serviceability and capital purposes, even if you never rent it out.

Most lenders assess a second property using the same framework they apply to rental investments, which means lower borrowing capacity, higher deposit requirements in most cases, and stricter serviceability buffers. The distinction matters because buyers based in Richmond who assume the same deposit and rate apply to a coastal property as they would to a principal place of residence often find their borrowing power reduced by 20 to 30 per cent once the lender classifies the loan correctly.

Why holiday homes are classified as investment loans

Under Prudential Standard APS 112, where there is any doubt about whether a loan is for owner-occupied or investment purposes, the loan must be treated as an investment loan. A holiday home is not your principal place of residence, so lenders assign it to the investment category regardless of whether you plan to generate income from the property. That classification increases the risk weight applied to the loan, which in turn affects how much the lender is willing to advance and at what rate.

Consider a buyer who lives in Richmond and wants to purchase a property near the coast for family use during school holidays. The buyer has a household income of $180,000 and an existing owner-occupied mortgage of $550,000. When they apply for finance to purchase the holiday home, the lender treats the second property as an investment loan. The serviceability buffer is applied at 3.0 percentage points above the product rate, and the lender applies a stricter debt-to-income assessment. The borrowing capacity is lower than if the property were owner-occupied, and refinancing to release equity from the existing Richmond property may be required to bridge the shortfall.

Deposit and LMI requirements for a second property

Most lenders require a minimum 10 per cent deposit for investment loans, and many major lenders prefer 20 per cent to avoid charging Lenders Mortgage Insurance. Where the loan-to-value ratio exceeds 80 per cent, LMI applies, and the premium is calculated on a sliding scale based on the loan amount and LVR. The cost can run into thousands of dollars and is typically capitalised into the loan or paid upfront at settlement.

The Australian Government 5% Deposit Scheme does not apply to holiday homes. The scheme is available only to first home buyers purchasing a property they intend to occupy as their principal place of residence, or to eligible single parents under specific conditions. Investment property loans for holiday homes therefore require genuine savings or accessible equity from an existing property.

If you own a home in Richmond and have built equity over several years, you may be able to use that equity as a deposit for the holiday home without selling or disrupting your current living arrangement. Lenders will assess the combined loan-to-value ratio across both securities and apply serviceability tests that account for both loans. Where the combined LVR is above 80 per cent, LMI may still apply even if each individual loan sits below that threshold.

How lenders assess rental income you don't plan to collect

Some lenders will include a notional rental income in their serviceability calculation even if you state that the property will not be rented. This is not universal, and policies vary between lenders. Where a lender does apply a rental income assessment, they typically use 80 per cent of the estimated market rent to account for vacancy, maintenance and management costs. This can improve your borrowing capacity, but only if the lender's policy supports it and if you can provide a rental appraisal from a licensed agent in the area where the holiday home is located.

Other lenders take a more conservative approach and assess the loan purely on your employment income and existing liabilities, without any offset for potential rental income. In that scenario, your borrowing capacity is determined entirely by your ability to service both your primary mortgage and the new holiday home loan from your salary or business income.

In our experience, buyers who intend to occasionally rent out the holiday home through short-term platforms benefit from engaging with lenders who recognise rental income in their assessment, even if that income is seasonal or intermittent. The difference in borrowing capacity can be substantial, particularly where the buyer's existing debt level is close to the lender's debt-to-income threshold.

Interest-only versus principal and interest repayments

Holiday home buyers often prefer interest-only repayments during the initial period to manage cash flow, particularly if they are servicing two mortgages. Interest-only periods typically run for one to five years, after which the loan reverts to principal and interest unless you renegotiate the terms. Under APS 112, a long-term interest-only residential loan is classified as non-standard where the LVR is greater than 80 per cent and the contractual interest-only period is greater than five years or is not specified. This classification increases the capital that the lender must hold against the loan, which can reduce the attractiveness of offering extended interest-only terms.

From 1 February 2026, APRA's debt-to-income lending limits apply separately to owner-occupier and investor lending portfolios. Each lender may advance up to 20 per cent of new investor loans to borrowers with a total DTI ratio of six times or greater. If your combined debt across both properties pushes your DTI above that threshold, some lenders may decline the application or require a larger deposit to bring the ratio down.

A split loan structure can sometimes provide flexibility, with part of the holiday home loan fixed to lock in certainty and part variable to allow for additional repayments or offset account access. Fixed rates provide protection against rate rises, but break costs apply if you pay down the fixed portion early or refinance before the fixed term ends.

Tax treatment and negative gearing restrictions from the 2027-28 income year

Holiday homes purchased after 7:30pm AEST on 12 May 2026 are subject to the new negative gearing rules that take effect from the 2027-28 income year. Under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, losses related to residential investment properties purchased after that date are deductible only against other income from residential properties, including capital gains. Excess losses can be carried forward to offset residential property income in future years, but they cannot be deducted against salary, wages or other non-property income.

If you purchased a holiday home before that date, the property is grandfathered under the old rules, and losses remain deductible against other income including salary and wages. This distinction is important for buyers who are considering timing their purchase, particularly if they expect the property to run at a loss in the early years due to interest costs, council rates, insurance and maintenance.

From 1 July 2027, the 50 per cent capital gains tax discount for individuals, trusts and partnerships on residential property is replaced by cost base indexation and a 30 per cent minimum tax rate on capital gains accruing from that date. Investors index the cost base of their assets in line with inflation and pay tax on above-inflation profits only. The changes apply to gains accruing from 1 July 2027, not to the portion of the gain that accrued before that date, provided the property was held at that time.

These tax changes do not affect the loan structure or the lender's assessment, but they do affect the after-tax return on the investment and should inform your decision about whether to proceed, the timing of the purchase, and whether the property is likely to deliver the outcome you expect over the intended holding period. A licensed tax adviser can model the impact on your specific circumstances.

Choosing the right loan features for a property you visit occasionally

An offset account linked to the holiday home loan allows you to park surplus cash and reduce the interest charged without making additional repayments that you cannot later withdraw. This is particularly useful if you expect irregular income, bonuses or other lump sums that you want to apply to the loan temporarily while retaining access to the funds.

Portability is another feature worth considering if you think you may sell the holiday home and purchase a different property in the future. A portable loan allows you to transfer the existing loan to a new security without re-applying or paying discharge and establishment fees, though the lender will still assess the new property and may adjust the terms based on the updated LVR and your financial position at the time.

Redraw facilities are common on variable rate loans and allow you to withdraw any additional repayments you have made above the minimum. Lenders distinguish between redraw and offset, and the tax treatment can differ depending on the purpose for which you use the redrawn funds. If you redraw to fund personal expenses, the interest on that portion of the loan may not be deductible, even if the original loan was for investment purposes. This is a complex area and should be discussed with your accountant before making any withdrawals.

Serviceability across two properties in different locations

Lenders assess your ability to service both the existing mortgage on your Richmond home and the new holiday home loan at the same time. The serviceability buffer of 3.0 percentage points applies to both loans, meaning the lender tests whether you can afford to make repayments at a rate 3.0 percentage points higher than the actual product rate on each loan.

If your existing mortgage is on a fixed rate and the holiday home loan is variable, the lender will apply the buffer to each loan separately and aggregate your total committed expenditure. Living expenses are also factored in, using either your declared expenses or the Household Expenditure Measure, whichever is higher. Buyers with dependants, existing personal loans, or credit card limits often find that even modest liabilities reduce borrowing capacity significantly when stretched across two properties.

Where both properties are in different states or regions, council rates, insurance premiums and maintenance costs can vary. Lenders do not always account for these differences in detail, but they do affect your actual cash flow once you settle. A property near the coast may attract higher insurance premiums due to flood or bushfire risk, and some regional councils levy higher rates than inner-city municipalities. Budget for these costs separately and ensure they are reflected in your serviceability assessment, particularly if you are close to the lender's maximum borrowing threshold.

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