What are Holiday Home Loans and How to Fund Yours

A holiday home purchase sits somewhere between personal use and investment, which affects how lenders assess serviceability and how you structure the loan.

Most holiday homes are purchased as second properties while the buyer retains their primary residence. Lenders treat these as investment loans in most cases, even if you intend to use the property yourself for part of the year. That distinction changes your borrowing capacity, the rate you pay, and how much deposit you need.

How Lenders Assess Holiday Home Loan Applications

Lenders assess a holiday home loan using investment criteria unless the property will become your principal place of residence. That means rental income may be included in serviceability, but only at a discounted rate of between 70% and 80% of the expected rent. If you do not plan to rent the property at all, serviceability relies entirely on your existing income covering both your current home loan and the new loan for the holiday property.

Consider a professional couple in South Yarra with a combined income of $280,000 and an existing loan of $850,000 on their Hawksburn residence. They want to purchase a coastal property for around $700,000. Even with strong income, the second property adds a new commitment of roughly $3,800 per month in principal and interest repayments at current variable rates. Lenders assess whether that additional commitment, combined with existing debts and living expenses, leaves sufficient surplus. In our experience, borrowers often underestimate the weight lenders place on total debt servicing when a second property is involved, particularly when no rental offset is claimed.

Deposit requirements are usually higher for a holiday home loan than for an owner-occupied purchase. Most lenders require at least a 10% to 20% deposit, and Lenders Mortgage Insurance (LMI) applies if the loan exceeds 80% of the property value. Some lenders will consider using equity in your primary residence to fund the deposit, which can reduce upfront cash requirements but increases the total amount borrowed.

Interest Rate Structures for Holiday Home Loans

Investment loans attract slightly higher interest rates than owner-occupied home loans, typically between 0.10% and 0.30% above equivalent owner-occupied rates. That margin reflects the higher risk lenders assign to second properties. The choice between variable rate, fixed rate, or a split structure depends on how long you plan to hold the property and your tolerance for rate movement.

A split loan structure can reduce exposure to rate increases while retaining some flexibility. For instance, fixing 60% of a $600,000 loan and leaving 40% variable provides certainty on repayments for the fixed portion while maintaining access to an offset account on the variable portion. We regularly see this approach used by South Yarra clients who value certainty but want to retain the option to make extra repayments or link an offset account without penalty.

Offset Accounts and Interest-Only Repayments

An offset account linked to the variable portion of your holiday home loan reduces the interest charged by offsetting your savings balance against the outstanding loan amount. If you hold $80,000 in an offset account against a $600,000 loan, interest is only calculated on $520,000. This structure is particularly useful if you plan to rent the property occasionally and want to quarantine rental income in the offset to reduce interest costs while maintaining full access to those funds.

Interest-only repayments are another option for holiday home loans, particularly if you expect the property to appreciate or if you want to preserve cash flow in the early years. Interest-only terms are typically offered for up to five years, after which the loan reverts to principal and interest unless renegotiated. This structure reduces monthly repayments during the interest-only period but does not build equity in the property during that time. Lenders apply stricter serviceability tests to interest-only loans, and not all lenders offer interest-only on properties that are not rented.

Tax and Rental Income Considerations

If you rent your holiday home for part of the year, you can claim a portion of interest, maintenance, and other holding costs as deductions against rental income. The deductible portion is calculated based on the number of days the property is genuinely available for rent. If the property is rented for 120 days and available for rent for another 80 days but you use it yourself for 60 days, only 200 days out of 365 are deductible.

Capital gains tax applies when you sell a holiday home because it is not your principal place of residence. The main residence exemption does not apply unless you move into the property and establish it as your primary home for a period before selling. We recommend discussing the tax implications with an accountant before structuring the loan, as the choice between interest-only and principal and interest, and the use of offset accounts, can affect your tax position and long-term return.

Using Equity from Your Primary Residence

Many buyers in South Yarra access equity in their existing home to fund the deposit on a holiday property. If your primary residence is valued at $1,800,000 and your current loan is $900,000, you have $900,000 in equity. Lenders typically allow you to borrow up to 80% of the property value without incurring LMI, which means you could access up to $540,000 in usable equity after accounting for the existing loan.

Refinancing to release equity involves increasing your home loan and using the additional funds as a deposit for the holiday property. This approach avoids the need to liquidate investments or draw down savings, but it does increase the debt secured against your primary residence. Lenders assess the combined loan amount across both properties when determining serviceability, so releasing equity does not bypass serviceability requirements.

Loan Portability and Future Flexibility

Some lenders offer portable loans, which allow you to transfer your existing loan to a new property if you sell your current home or the holiday property. This feature can be useful if you plan to upgrade your primary residence in South Yarra and want to retain the same loan terms and rate without reapplying. Not all lenders offer portability, and those that do may impose conditions around timing and the type of property being purchased.

Flexibility also extends to the ability to make extra repayments without penalty and to redraw those funds if needed. Variable rate loans generally allow unlimited extra repayments and redraw, while fixed rate loans often limit additional repayments to a set amount per year, typically between $10,000 and $30,000, before break costs apply. If you expect irregular income or bonuses, a variable loan or split structure with a substantial variable portion provides more flexibility.

Call one of our team or book an appointment at a time that works for you. We work with clients across South Yarra and have access to home loan options from lenders across Australia, including those with specific programs for holiday home purchases and investment lending.

Frequently Asked Questions