What Are the Lending Rules for Holiday Homes?

Lenders treat holiday home purchases as investment properties, even if you're not planning to rent them out.

If you're buying a coastal retreat in Rosebud or a weekender near Warrandyte, your lender will assess the purchase under investment lending criteria. That means a larger deposit requirement, different interest rates, and stricter serviceability tests than you'd face with an owner occupied home loan. The decision you're making right now is whether to proceed with a holiday home purchase under these conditions, or adjust your strategy to improve your borrowing position before you apply.

Why Holiday Homes Are Assessed as Investment Properties

Banks categorise any property that isn't your primary residence as an investment, regardless of how you intend to use it. That classification determines your minimum deposit, the interest rate you'll pay, and how rental income is treated in serviceability calculations. Even if you never plan to list the property on a short-term rental platform, lenders won't offer owner-occupier rates or loan to value ratios. The property's potential to generate income matters more to the bank than your intended use.

Consider a buyer purchasing a holiday home in Mornington with no plans to rent it out. They'll still need a minimum 10% deposit plus costs, and lenders will apply a higher interest rate than they would for a primary residence. Some lenders will factor in potential rental income to help with serviceability, while others won't consider it at all if you're not planning to rent. The result is that your borrowing capacity for a holiday home is often lower than for an owner-occupied property, even when your income and deposit are identical.

Deposit and LMI Requirements for Holiday Home Purchases

You'll need at least a 10% deposit to secure finance for a holiday home, but most borrowers aim for 20% to avoid Lenders Mortgage Insurance. LMI premiums on investment loans can add thousands to your upfront costs, and unlike owner-occupied purchases, there are fewer low-deposit options available. Genuine savings still matter, particularly if you're borrowing at higher loan to value ratios, and lenders will want to see that deposit held in your account for at least three months.

If you're planning to use equity from your existing home rather than cash savings, the same LVR limits apply across your total borrowings. That means if you own a home worth $800,000 with a $400,000 mortgage, and you want to borrow an additional amount to purchase a holiday property, the combined debt across both properties typically can't exceed 80% of their combined value without triggering LMI. Lenders assess the entire security position, not just the new purchase in isolation.

How Rental Income Is Treated in Serviceability

If you plan to rent your holiday home for part of the year, lenders will include a portion of that rental income in their serviceability assessment. Most lenders apply a shading factor, typically 80%, meaning they'll only count $800 of every $1,000 in expected rent when calculating your borrowing capacity. You'll need to provide evidence of the property's rental potential, either through a property manager's rental appraisal or comparable listings in the area. If you're not planning to rent the property at all, lenders won't include any rental income, which can significantly reduce how much you're able to borrow.

In our experience, buyers purchasing holiday homes near popular coastal areas like Hastings or Mount Martha often underestimate how much rental income can improve their serviceability. A property that generates $25,000 annually in short-term rental income might add around $20,000 to your assessed income after shading, which can make the difference between approval and refusal when your existing commitments are already high. Whether you choose to rent the property year-round, seasonally, or not at all will directly affect the loan amount you can access.

Interest Rate Structures and Offset Options

Interest rates on holiday home loans sit somewhere between owner-occupied and pure investment rates, though most lenders price them as investment loans. You'll have access to variable, fixed, and split rate options, along with features like offset accounts and redraw facilities. An offset account linked to your holiday home loan can be particularly useful if you're holding rental income or saving for future improvements, as every dollar in the offset reduces the interest you're charged without locking those funds away.

Some lenders offer portable loan products that let you switch the security property or convert the loan to owner-occupied if your circumstances change. That flexibility matters if you later decide to sell your primary residence and move into the holiday home, or if you want to sell the holiday property and redirect the loan to a different investment. Not all lenders offer portability on investment products, so it's worth considering during the application if your plans might shift over the next few years.

Structuring the Loan Across Multiple Properties

If you already own your primary residence, your holiday home loan will sit alongside your existing mortgage as a separate facility. Some buyers choose to refinance their entire position to consolidate debt and access better rates, while others prefer to keep the holiday home loan separate to maintain clarity between personal and investment borrowings. How you structure the loans affects your interest deductibility, offset arrangements, and flexibility to sell one property without disrupting the other.

In a scenario where a buyer owns a home in Macleod and wants to purchase a weekender in Diamond Creek, they might establish a split loan structure on the holiday property: part fixed to lock in repayments during peak rental seasons, part variable with an offset to manage cash flow during quieter months. That setup lets them benefit from rate certainty while retaining flexibility to make extra repayments when rental income is strong. The loan structure should match how you plan to use and fund the property, not just what's available at application.

Tax and Deductibility Considerations

Interest on a holiday home loan is only tax-deductible if the property is genuinely available for rent and producing income. If you're using the property exclusively for personal holidays, the interest isn't deductible, even though the loan is classified as an investment product by your lender. That distinction matters when you're deciding whether to rent the property out or keep it for private use, as the tax treatment can significantly affect the net cost of holding the property each year.

You'll need to keep detailed records if you're splitting the property's use between personal and rental periods, as the deductibility is apportioned based on how many days the property was genuinely available to rent. A property used personally for eight weeks and rented for the remainder of the year will have roughly 80% deductible interest, assuming it was genuinely available during that rental period. Your accountant will guide the specifics, but the loan structure should support that split from the outset if you're planning mixed use.

What Lenders Assess Beyond Your Deposit

Lenders will review your existing debts, living expenses, and income stability when assessing your holiday home application. If you're already servicing a mortgage, car loan, or other credit commitments, those repayments reduce your borrowing capacity for the new property. Lenders also apply a buffer rate, typically 3% above the actual interest rate, to ensure you can still afford repayments if rates rise. That buffer has a bigger impact on investment loans because the interest rates start higher than owner-occupied products.

Your employment type and income consistency matter as well. Self-employed buyers or those with variable income will need to provide additional documentation, usually two years of tax returns and financials, compared to PAYG employees who can often rely on payslips and a letter from their employer. If you're purchasing the holiday home with a partner or spouse, lenders will assess both incomes and all liabilities jointly, so any credit commitments either of you hold will affect the combined borrowing capacity.

Call one of our team or book an appointment at a time that works for you to discuss your holiday home purchase and explore which loan structure aligns with how you plan to use the property.

Frequently Asked Questions