Lender Assessment Treats Holiday Homes as Investment Properties
Most lenders assess a holiday home loan using investment property criteria, even when you intend to use the property personally rather than rent it out. This means stricter serviceability calculations and typically a higher interest rate than an owner occupied home loan. Lenders factor in that the property won't generate rental income if you're keeping it for personal use, which affects how much you can borrow against your current income.
The loan to value ratio requirements often sit at 80% or below without Lenders Mortgage Insurance, though some lenders will go to 90% LVR if your financial position is strong. Your borrowing capacity depends on your existing commitments, income stability, and whether you already hold an owner occupied loan or investment loans on other properties.
The Rental Income Question Changes Your Loan Structure
If you plan to rent the holiday home for part of the year, lenders will treat it as an investment property and may include a portion of projected rental income in their serviceability assessment. Most lenders apply a shading rate of 70% to 80% of the rental estimate, meaning they only count that percentage toward your borrowing capacity. This can actually work in your favour compared to a pure holiday home with no rental income at all.
Consider a scenario where a Bentleigh family purchases a coastal property in Lorne with the intention of using it personally during school holidays but renting it out for the remainder of the year. The lender assesses projected rental income of $2,500 per month but only factors in $1,875 per month at a 75% shading rate. The loan structure includes an offset account linked to their variable rate investment loan, allowing them to park surplus funds and reduce interest costs during periods when the property is occupied by tenants.
Interest Only Versus Principal and Interest Repayments
Many buyers choose interest only repayments for holiday home loans to reduce monthly outgoings, particularly if the property will generate some rental income. This approach keeps cash flow manageable while allowing you to redirect surplus funds toward your primary residence or other investments. However, you won't build equity in the holiday home during the interest only period, and lenders typically limit this option to five years before reverting to principal and interest.
Principal and interest repayments build equity from day one and reduce your overall interest cost across the life of the loan. If you're planning to hold the property long term and have sufficient income to support higher repayments, this structure provides more financial stability. The right choice depends on your broader financial position and whether you're holding other debt that could benefit from prioritised repayments.
Fixed Rate, Variable Rate, or Split Rate Options
A variable rate home loan offers flexibility to make extra repayments and access features like an offset account, which can be particularly useful if you're generating rental income or have irregular cash flow. Variable interest rate loans also allow you to redraw funds if needed, though this should be approached cautiously with investment debt.
Fixed interest rate home loans provide certainty over your repayments for a set period, typically between one and five years. This can be valuable if you're concerned about rate movements or want predictable costs for budgeting purposes. However, fixed rate loans usually restrict extra repayments and don't offer offset accounts, which limits your ability to reduce interest costs through surplus cash.
A split loan divides your borrowing between fixed and variable portions, combining repayment certainty with ongoing flexibility. In a scenario where a Bentleigh buyer borrows $600,000 to purchase a holiday property in the Mornington Peninsula, they might fix $400,000 for three years and leave $200,000 on a variable rate with a linked offset. The fixed portion protects them from rate increases, while the variable portion allows them to deposit rental income into the offset account and reduce interest on that component.
Deposit Requirements and Genuine Savings
Lenders typically require a minimum 10% deposit for holiday home purchases, though 20% is more common to avoid Lenders Mortgage Insurance. The deposit must usually come from genuine savings held for at least three months, though equity in your existing Bentleigh property can sometimes be used instead. If you're accessing equity from your primary residence, the lender will reassess your borrowing capacity across both loans to ensure you can service the combined debt.
Some lenders accept gifted deposits from family members, but this usually requires a statutory declaration and may still trigger LMI if your total contribution falls below 20%. Equity built in your current home provides the most straightforward path to funding a holiday property deposit, particularly if you've held the Bentleigh property for several years and benefited from the area's consistent capital growth near Centre Road and the shopping precinct.
Tax Implications and Loan Structuring
If the holiday home generates any rental income, the loan interest becomes tax deductible for the period the property is rented. This means keeping your holiday home loan separate from your owner occupied loan is critical for claiming deductions correctly. Mixing the two loans or using a line of credit that combines purposes can create complications at tax time and limit your ability to claim legitimate deductions.
Maintaining clear separation also protects your position if you later decide to convert your Bentleigh home into an investment property and move elsewhere. The loan structure you establish now can have long term tax consequences, so structuring correctly from the outset avoids costly refinancing later.
Location and Lender Appetite
Some lenders have postcode restrictions or reduced appetite for properties in regional or remote areas, particularly if the holiday home is in a location with limited market depth or high exposure to tourism volatility. Coastal towns, ski resorts, and areas reliant on seasonal visitors can all attract more conservative lending policies. This doesn't mean you can't borrow, but it may limit your home loan options or require a larger deposit.
Properties in established holiday destinations with consistent demand and strong price history tend to receive more favourable assessment than emerging or niche markets. If you're purchasing in a location that's less familiar to major lenders, working with a mortgage broker who has access to a broad panel of lenders becomes particularly valuable. We regularly see situations where one lender declines a holiday home application based on location, while another lender on our panel has no issue with the same postcode.
Portable Loan Features for Future Flexibility
A portable loan allows you to transfer the existing loan to a different property if you sell the holiday home and purchase another. This feature can save you time and costs if your circumstances change or you decide to move your holiday property to a different location. Not all lenders offer portability, and those that do often have conditions around the timing and type of replacement property.
If you're likely to upgrade or change your holiday property within a few years, confirming portability at the outset provides useful flexibility. This is particularly relevant for buyers who start with a modest coastal unit and later move to a larger house as their financial position improves.
Call one of our team or book an appointment at a time that works for you to discuss how different loan structures apply to your holiday home purchase and which lenders suit your specific circumstances.
Frequently Asked Questions
Do lenders treat holiday homes as investment properties?
Most lenders assess holiday home loans using investment property criteria, even when you won't be renting the property out. This typically means stricter serviceability calculations and higher interest rates than owner occupied loans, as lenders factor in the lack of rental income to offset costs.
Can I use equity from my Bentleigh home to buy a holiday property?
Yes, equity in your existing Bentleigh property can be used as a deposit for a holiday home purchase. The lender will reassess your borrowing capacity across both loans to ensure you can service the combined debt, and you'll need sufficient equity to meet the required loan to value ratio.
Should I choose interest only or principal and interest repayments for a holiday home loan?
Interest only repayments reduce monthly outgoings and can suit buyers who want to direct surplus funds elsewhere, but you won't build equity during that period. Principal and interest repayments cost more monthly but reduce your overall interest and build equity from day one.
What deposit do I need for a holiday home purchase?
Most lenders require a minimum 10% deposit, though 20% is more common to avoid Lenders Mortgage Insurance. The deposit typically needs to come from genuine savings or equity in your existing property.
Can I claim tax deductions on a holiday home loan?
Loan interest becomes tax deductible for periods when the property is rented out. Keeping your holiday home loan separate from your owner occupied loan is essential for claiming deductions correctly and avoiding complications at tax time.
