Holiday Home Loans: What Not to Do When Borrowing

A holiday home changes how lenders view your position.

The property is treated as investment, regardless of whether you rent it out. This classification affects the interest rate you receive, the deposit required, and how much you can borrow against your income. Lenders apply tighter serviceability margins, and most require a minimum 10% deposit before they will consider the application. Some lenders will accept 10%, though the majority ask for 20% to avoid lenders mortgage insurance.

The Classification Question Lenders Always Ask

A holiday home is classified as an investment property for lending purposes even if you never lease it to a tenant. The reason is straightforward: the property is not your principal place of residence. That means you pay the investment property interest rate, which at current pricing sits between 0.15% and 0.40% above the equivalent owner-occupied rate depending on the lender and loan amount. It also means you are assessed under the investment lending serviceability criteria, which are more conservative than the owner-occupied equivalent.

Consider a couple purchasing a coastal property in Mornington. They plan to use it four weekends a month and do not intend to lease the property. The lender still assesses the loan as investment. If the loan amount is $600,000, the difference in rate translates to roughly $900 to $2,400 per year in additional interest. Over a 30-year term, that compounds.

Deposit and Lenders Mortgage Insurance

Most lenders require a 20% deposit for a second property purchase. A handful will accept 10%, but this typically attracts LMI, which adds several thousand dollars to the upfront cost. At an 85% loan-to-value ratio on a property valued at $700,000, the LMI premium can range from $10,000 to $15,000 depending on the insurer and the borrower's credit profile. If you already hold a mortgage on your principal residence, lenders will factor that existing debt into the serviceability calculation before approving a second loan.

In our experience, borrowers who attempt to minimise the deposit by relying on equity in their existing home often underestimate how much usable equity they actually have. If your primary residence is valued at $1,200,000 and you owe $600,000, the lender will typically lend against 80% of the property value, which is $960,000. Subtracting your existing debt leaves $360,000 in accessible equity. After allowing for costs, that is enough to fund a deposit on a second property, but it also increases your total debt and tightens your borrowing capacity for any future lending.

Split Rate Structures for Properties You Hold Long Term

A split loan allows you to fix part of the debt and leave the remainder on a variable rate. This structure suits holiday home buyers who want certainty on a portion of the repayment while retaining access to an offset account on the variable portion. Fixing 50% to 70% of the loan protects against rate rises while maintaining flexibility to make extra repayments or redraw against the variable portion.

The key consideration is tenure. If you plan to hold the property for a decade or more, locking in part of the debt at current fixed rates provides a hedge against future rate movements. If you plan to sell within three to five years, a variable-only loan avoids the risk of fixed rate break costs, which can run to tens of thousands of dollars if you exit the loan early during a period of rising rates.

Rental Income and How Lenders Treat It

If you decide to lease the property for part of the year, lenders will include the rental income in their serviceability assessment. Most lenders apply a haircut of 20% to the gross rental income to account for vacancies, maintenance and management costs. If the property generates $30,000 per year in rent, the lender will assess $24,000 as usable income. That additional income can improve your borrowing capacity, though the benefit is often modest once the haircut is applied.

South Melbourne residents purchasing a second property in coastal Victoria regularly structure the loan to accommodate seasonal rental income. A property in Barwon Heads, for example, might be leased over the summer months and used by the owners for the remainder of the year. The rental income offsets part of the holding cost, but lenders will still assess the full loan repayment against your income, not the net position after rental income is applied.

Interest-Only Repayments and the Five-Year Limit

An interest-only period reduces the monthly repayment by deferring principal reduction. This structure is common among investors who want to maximise cashflow during the early years of ownership. Most lenders offer interest-only terms of up to five years on residential investment loans, after which the loan reverts to principal and interest repayments.

The trade-off is that you do not reduce the debt during the interest-only period, which means the principal and interest repayment, when it begins, is higher than it would have been if you had started repaying principal from the outset. If you borrow $500,000 on an interest-only basis for five years and then revert to principal and interest over the remaining 25 years, the repayment in year six is higher than the repayment would have been in year one on a 30-year principal and interest loan. That future repayment is factored into the lender's serviceability assessment at the time you apply.

Offset Accounts and Redraw on Investment Loans

An offset account linked to the loan reduces the interest charged without affecting the deductibility of the interest for tax purposes. If you have $50,000 sitting in an offset account linked to a $600,000 investment loan, you pay interest only on $550,000. The full loan balance remains deductible because the offset account is a separate deposit account, not a reduction in the loan principal.

Redraw facilities allow you to withdraw extra repayments you have made, but they carry tax complexity for investment loans. If you make additional repayments and later redraw those funds for a purpose unrelated to the investment property, the portion of interest attributable to the redrawn amount may not be deductible. An offset account avoids that issue entirely.

Tax Treatment Under Current and Upcoming Rules

For properties held at 7:30pm AEST on 12 May 2026, losses from the investment property remain deductible against other income, including salary. That includes interest costs, council rates, insurance, and maintenance. For properties purchased after that date, losses are deductible only against other residential property income from the 2027-28 income year onward. If your holiday home runs at a loss and you do not have other residential property income to offset it against, the loss is carried forward to future years.

Capital gains on holiday homes sold before 1 July 2027 attract the 50% discount if the property has been held for more than 12 months. From 1 July 2027, the discount is replaced by cost base indexation and a 30% minimum tax rate on gains accruing from that date. The transition affects the after-tax return on properties purchased now and sold in future years, particularly in areas where capital growth is expected to exceed inflation.

Portability and What Happens If You Sell Your Primary Residence

Some lenders offer portable loans, which allow you to transfer the existing loan to a new property without breaking the contract or paying discharge fees. This feature is relevant if you plan to sell your primary residence in South Melbourne and purchase another while retaining the holiday home. Not all lenders offer portability, and those that do typically require the new property to be of equal or greater value than the property being sold.

If the loan is not portable and you need to discharge it, you will incur discharge fees and, if the loan includes a fixed rate component, potential break costs. Checking portability at the time you arrange the loan avoids that issue.

Debt-to-Income Limits from February 2026

From 1 February 2026, APRA limits apply to new lending by authorised deposit-taking institutions. Each lender may approve up to 20% of new owner-occupier loans and 20% of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. If your household income is $150,000 and your total proposed debt across your primary residence and holiday home is $900,000 or more, the application may fall within the 20% threshold and require additional justification or a larger deposit.

Bridging loans for owner-occupiers and loans for new dwelling construction are excluded from the limit. Holiday home purchases are not excluded and are assessed as investor loans for the purpose of the DTI measure.

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