Understanding the basics of holiday home loans

A holiday home loan is not the same as your owner-occupied mortgage.

Lenders classify any property you don't live in as an investment, even if you never rent it out. That classification changes the interest rate you'll pay, the deposit you'll need, and the way your borrowing capacity is calculated. If you're thinking about buying a coastal retreat or a weekender in the hills, you need to understand how lenders view the purchase before you start looking at properties.

How lenders calculate your borrowing capacity for a second property

Your borrowing capacity for a holiday home is assessed differently to your first home because lenders treat the purchase as investment lending. They'll apply a higher interest rate buffer when they calculate serviceability, usually around 3 percentage points above the actual loan rate, and they won't count any assumed rental income unless you can demonstrate a genuine intention to lease the property.

Consider a primary teacher earning $95,000 a year with an existing mortgage of $420,000 and monthly repayments of $2,600. If you want to borrow an additional $350,000 for a holiday property, the lender will assess your ability to service both loans at a buffered rate, not the advertised rate. Your existing debts, ongoing expenses, and any other credit commitments all reduce the amount you can borrow. Even if you plan to use the holiday home only a few weeks each year, lenders won't factor in any personal benefit when assessing the loan.

Your borrowing capacity shrinks when you're applying for a second loan because the lender needs to be satisfied you can afford both mortgages simultaneously. Some lenders also apply a debt-to-income cap, which limits total lending to a multiple of your gross income. From February 2026, authorised deposit-taking institutions can lend no more than 20 per cent of new owner-occupier loans and 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. If your total borrowing across both properties pushes you above that threshold, you may find your options more limited with certain lenders.

Deposit and LMI requirements for holiday home purchases

You'll need at least a 10 per cent deposit for most holiday home loans, and many lenders prefer 20 per cent to avoid LMI. Unlike owner-occupied lending, where some profession-based LMI waivers exist, holiday home loans are classified as investment lending and generally don't qualify for those concessions. If you borrow above 80 per cent of the property value, you'll pay LMI, and the premium can add several thousand dollars to your upfront costs.

Using equity in your existing home is a common way to fund the deposit. If your current property has increased in value and you've paid down the mortgage, you may be able to access that equity without selling or using cash savings. Lenders will value both properties and calculate your total loan-to-value ratio across the combined security. Some lenders cap the total LVR at 80 per cent when you're using cross-securitised properties, while others allow up to 90 per cent with LMI.

Fixed, variable, or split: which loan structure suits a holiday property

Most buyers choose either a variable rate or a split loan structure for a holiday home. A variable rate gives you flexibility to make extra repayments without penalty, which can be useful if you plan to pay the loan down faster or if your income fluctuates during the year. A fixed rate locks in your repayments for a set period, usually between one and five years, but limits your ability to make lump sum payments beyond a small annual cap.

A split loan divides your borrowing between fixed and variable portions. You might fix 50 per cent of the loan to protect against rate rises and leave the other 50 per cent variable for repayment flexibility. This approach works well if you want some certainty around your budget but also want the option to use any spare cash to reduce the variable portion. Keep in mind that fixed rates on investment loans are often higher than fixed rates for owner-occupied lending, so compare the actual rates offered before committing to a structure.

If you're considering a holiday home purchase alongside other property goals, such as expanding your property portfolio, the loan structure you choose now can affect your ability to borrow again later. Lenders reassess your serviceability each time you apply for credit, and the repayment commitments on your holiday home will factor into that calculation.

Interest-only repayments and offset accounts

Some lenders offer interest-only repayments for investment loans, including holiday home purchases. An interest-only period, typically up to five years, reduces your monthly repayment because you're not paying down the principal. This can help with cash flow if you're managing two mortgages, but it also means you're not building equity in the holiday property during that period.

An offset account linked to your holiday home loan can reduce the interest you pay without locking funds into the mortgage. Any balance you hold in the offset account reduces the loan balance on which interest is calculated. If you plan to use the property only occasionally and want to keep savings accessible, an offset account gives you flexibility while still reducing your interest costs. Not all lenders offer offset accounts on investment loans, and some charge a higher interest rate or annual fee for the feature, so check the terms before deciding.

If you do rent out the holiday home for part of the year, an interest-only loan may allow you to claim the full interest expense as a tax deduction, but you should speak to a tax adviser about the implications of mixed use. The ATO has specific rules about apportioning expenses when a property is used for both private and income-producing purposes.

Stamp duty and ongoing costs

Stamp duty is payable on the purchase of a holiday home in all states and territories, and you won't qualify for any first home buyer concessions or exemptions because the property is not your principal place of residence. Stamp duty is calculated on the full purchase price, and the rate varies depending on the state and the value of the property. In some states, you may also pay a higher stamp duty rate for investment properties or second homes.

Ongoing costs include council rates, water rates, insurance, maintenance, and any body corporate fees if the property is in a strata scheme. These costs don't stop when you're not using the property, and lenders will factor them into your serviceability assessment. If you plan to rent the property out occasionally, you'll also need landlord insurance and may incur property management fees if you use an agent to handle bookings and maintenance.

If you're weighing up whether to buy a holiday home or invest in a rental property, the decision often comes down to how you plan to use the asset and whether you're comfortable with the additional costs of ownership without rental income to offset them. For more on the basics of investment property lending, see buying your first investment property.

Loan pre-approval and settlement timelines

Getting loan pre-approval before you start looking gives you a clear budget and shows sellers you're a serious buyer. Pre-approval for a holiday home works the same way as any other loan application: the lender assesses your income, existing debts, expenses, and the equity you have available. The approval is conditional and subject to a satisfactory valuation of the property you want to purchase.

Settlement timelines for holiday homes are usually 30 to 90 days, depending on the contract terms and whether the property is in a regional area where valuations or building inspections might take longer. If you're buying in a popular holiday destination, be aware that property values can fluctuate with seasonal demand, and lenders will base their offer on a formal valuation, not the contract price.

Call one of our team or book an appointment at a time that works for you. We'll walk through your current position, the equity you have available, and the loan options that fit your circumstances without adding unnecessary cost or complexity to the process.

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