What are Holiday Home Loans and How Do They Work?

A holiday home loan is typically structured as an investment loan, even if you plan to use the property exclusively for your own holidays.

Lenders classify any property that is not your main residence as an investment, regardless of whether you rent it out. That classification affects your interest rate, your borrowing capacity, and the deposit required. The distinction matters because lenders apply a higher risk weight to investment lending under APRA's prudential framework, which flows through to pricing and approval criteria.

Why Holiday Homes Are Treated as Investment Properties

Lenders use your intention and the property's use to determine the loan type. If the property is not your main residence, the loan is treated as an investment loan, even if you never collect rent. The logic is that the property does not generate income to service the loan, and you are managing two sets of housing costs simultaneously. That increases your financial commitment and the lender's credit risk.

For most lenders, an investment loan means a higher interest rate compared to an owner-occupied loan, often by 0.3% to 0.6% per year. You will also need a larger deposit. While an owner-occupied purchase might require a 10% deposit with LMI, most lenders prefer at least 20% for investment lending to avoid the insurance premium. Some lenders will still lend above 80% LVR for holiday homes, but the cost of LMI on an investment loan is higher than on an owner-occupied loan at the same LVR.

How Lenders Assess Serviceability for a Second Property

Serviceability is the hurdle that catches most buyers. Lenders assess whether you can afford repayments on both your current home and the holiday property at the same time. Even if you own your home outright, the lender will assess your ability to service the new loan alongside your other commitments.

Under APRA's serviceability buffer, lenders must assess your ability to repay at a rate at least 3.0 percentage points above the actual loan rate. If the variable rate on your holiday home loan is 6.5%, the lender will test serviceability at 9.5%. That buffer applies to all new lending and has a material effect on how much you can borrow, particularly when you are already servicing a mortgage on your main residence.

Consider a buyer who earns $120,000 per year and has $400,000 remaining on their primary home loan. They want to borrow $500,000 to buy a coastal property. The lender will assess both loans at the buffered rate, which might reduce the amount they can borrow for the holiday home to $350,000, depending on other commitments. In that scenario, the buyer would need to increase their deposit or adjust the purchase price to fit within their capacity.

Can You Rent Out a Holiday Home to Improve Serviceability?

Rental income can improve your borrowing capacity, but lenders apply a haircut. Most lenders will only recognise 80% of the expected rental income when calculating serviceability. The 20% deduction accounts for vacancy periods, maintenance costs, and the risk that the property is not rented year-round.

If you plan to use the property for part of the year and rent it out for the rest, be upfront with your lender. Some lenders will accept a mix of personal use and rental income, while others prefer a clear commitment to either full rental or full personal use. The rental income must be supported by a rental appraisal from a licensed property manager or real estate agent in the area where the property is located.

In our experience, buyers who are flexible about rental use during peak holiday periods can unlock enough serviceability to make the purchase work. A property on the Mornington Peninsula that rents for $800 per week during summer might generate $30,000 to $35,000 per year if rented strategically. Lenders will recognise 80% of that figure, which adds roughly $24,000 to $28,000 to your serviceability calculation.

Interest-Only Repayments and Holiday Home Loans

Interest-only repayments are common on holiday home loans, particularly where the buyer is managing two mortgages. An interest-only period reduces your monthly repayment, which can improve cash flow and help you meet the lender's serviceability test.

Most lenders offer interest-only periods of up to five years on investment loans. After that period ends, the loan reverts to principal and interest repayments, and your monthly payment increases. The benefit is that you free up cash during the interest-only period, which can be directed toward your main residence or other investments. The downside is that you do not reduce the loan balance, so you pay more interest over the life of the loan.

If your home loan is already on a principal and interest structure, switching the holiday home loan to interest-only can make both loans more manageable in the short term. That structure works when your income is stable and you have a clear plan to pay down one or both loans over time.

Using Equity in Your Main Residence

If you have built up equity in your main residence, you can use that equity as part of your deposit for the holiday home. Equity is the difference between your property's current value and the amount you owe on your mortgage. Lenders will typically allow you to borrow up to 80% of your home's value without LMI, which means you can access equity without paying additional insurance costs.

As an example, if your home is worth $800,000 and you owe $400,000, you have $400,000 in equity. The lender will let you borrow up to 80% of the property value, which is $640,000. That leaves $240,000 in usable equity after accounting for your existing loan. You could use that equity as a deposit on a holiday home without needing to sell investments or drain your savings.

Using equity does mean your total debt increases, and you need to service both loans. The lender will assess your capacity to repay the combined debt, so your income and existing commitments will determine how much equity you can actually draw on. A loan health check before you start looking at properties can clarify how much equity is available and whether your serviceability supports a second purchase.

Offset Accounts and Tax Considerations

An offset account linked to your holiday home loan reduces the interest you pay without changing your loan balance. The balance in your offset account is deducted from your loan balance when interest is calculated, so a $50,000 balance in your offset account on a $500,000 loan means you only pay interest on $450,000.

If you plan to rent out the holiday home, even occasionally, the interest on the loan is tax-deductible. That deduction applies to the portion of the year the property is available for rent. If you use the property yourself for part of the year, you need to apportion the deduction based on the rental period. Placing surplus cash in an offset account rather than paying down the loan preserves the deductible debt, which can be useful from a tax perspective. Speak to your accountant about the most effective structure before settlement.

What If You Want to Convert the Holiday Home to Your Main Residence Later?

If your plans change and you decide to move into the holiday home permanently, you can ask your lender to convert the loan from an investment loan to an owner-occupied loan. That conversion typically reduces your interest rate and may improve your borrowing capacity if you want to refinance or take out another loan in the future.

The lender will require evidence that you have moved into the property and that it is now your principal place of residence. That evidence might include updated identification, utility bills, or a statutory declaration. Some lenders process the conversion quickly, while others may require a formal application. The change does not affect your loan term or repayment structure unless you choose to refinance at the same time.

Call one of our team or book an appointment at a time that works for you. We will walk through your current position, your deposit options, and the loan structures that fit your plan for a holiday property.

Frequently Asked Questions