Top tips to fund a holiday home with confidence

Lenders treat holiday homes as investment properties

A holiday home you plan to use yourself is still classified as an investment property by lenders. You'll need to meet investment loan serviceability criteria, which means demonstrating you can service both your existing home loan and the new loan without rental income. This typically requires a higher income or a lower debt-to-income ratio than your first purchase.

Consider someone from Wellard who owns a home with a $450,000 remaining balance and wants to buy a coastal retreat valued at $600,000. The lender assesses their ability to service both loans simultaneously, applying a buffer rate typically 3% above the actual interest rate. That means proving you can manage repayments even if rates climb significantly.

The deposit and LMI difference

Most lenders require a minimum 10% deposit for an investment property, though some will lend at higher loan-to-value ratios if you're willing to pay Lenders Mortgage Insurance. LMI on investment properties costs more than on owner-occupied loans because the lender views the risk differently. At an 85% LVR on a $600,000 property, LMI could add $15,000 to $20,000 to your upfront costs.

If you have equity in your Wellard home, you might use that equity as part or all of your deposit rather than drawing down cash savings. A property you bought several years ago may have increased in value, giving you accessible equity without selling. We regularly see buyers who prefer this approach because it preserves their cash flow and allows them to keep an emergency buffer in offset accounts linked to their primary home loan.

How loan structure affects your tax position

The interest on a loan used to purchase an investment property is generally tax-deductible, even if you're using the property for personal holidays rather than renting it out. Keeping your holiday home loan separate from your owner-occupied loan protects that deduction. If you refinance and blend the two loans together, the ATO may limit what portion of the interest you can claim.

An offset account linked to your owner-occupied loan helps you reduce interest on non-deductible debt, while leaving your holiday home loan to accrue deductible interest. Some buyers set up a split loan structure on their primary residence, fixing part of the loan and leaving part variable with an offset, then take out a separate interest-only loan for the holiday property to maximise deductions in the early years.

Interest-only versus principal and interest repayments

An interest-only period can make sense if your priority is managing cash flow while you're servicing two properties. Repayments are lower during the interest-only period because you're not reducing the principal, and the full interest amount remains deductible. Once the interest-only period ends, the loan reverts to principal and interest unless you apply to extend it.

This approach works well when you expect your income to increase over the next few years, or if you're planning to rent the property out seasonally and want flexibility in the meantime. Just keep in mind that you're not building equity during the interest-only phase, so your loan balance stays the same.

Serviceability tightens when you hold two properties

Lenders calculate serviceability on investment properties differently. Even if you plan to use the holiday home exclusively for yourself, many lenders will add notional rental income to your application, then apply a shading factor of around 80%. That means they assume you'll only receive 80% of the potential rent, and they still deduct ongoing costs like rates, insurance, and maintenance.

If your income is borderline for serviceability, choosing a lender that offers more flexible assessment policies can make the difference between approval and decline. Some lenders allow you to capitalise LMI into the loan rather than paying it upfront, which reduces the cash you need at settlement but increases your loan amount and ongoing repayments.

Location affects both borrowing power and property value

Properties in regional or remote areas can be harder to finance because some lenders have postcode restrictions or apply higher interest rates to locations they consider higher risk. A holiday home in a coastal town with strong tourism infrastructure will generally attract more competitive loan products than a property in a small inland area with limited services.

Wellard buyers looking at holiday homes within a few hours' drive typically find the financing process smoother than those targeting locations further afield. Lenders view proximity as a factor in your ability to maintain and manage the property, even if you're not renting it out. Properties in areas with consistent demand, such as the South West or down near Margaret River, tend to hold value more reliably than those in towns dependent on a single industry.

When to fix, split, or stay variable

Your rate strategy should match how you plan to use the property and how long you intend to hold it. A variable rate gives you flexibility to make extra repayments or sell without break costs, while a fixed rate locks in your repayments and protects you from rate rises during the fixed period. Many buyers choose a split loan structure, fixing part of the holiday home loan for certainty and leaving part variable to retain flexibility.

If you're planning to rent the property short-term through a platform during peak holiday periods, a variable loan lets you direct that income straight onto the loan without restrictions. If your primary goal is lifestyle and you want predictable repayments while managing two mortgages, a three-year fixed rate can provide that stability without locking you in for too long.

Borrowing capacity improves when you reduce other debts

Paying down credit cards, car loans, or personal loans before applying for a holiday home loan can significantly improve your borrowing capacity. Lenders assess your total monthly commitments, and even a small personal loan with $400 monthly repayments can reduce what you're approved to borrow by $80,000 or more, depending on the lender's serviceability model.

If you're serious about purchasing in the next six to twelve months, start by clearing any short-term debts and avoiding new credit applications. Lenders also look at your spending patterns over the previous three months, so keeping discretionary spending in check during that window can help your application. This preparation matters particularly for Wellard residents balancing a mortgage in a growth corridor with the desire to secure a lifestyle property elsewhere.

A holiday home purchase is a long-term decision that blends lifestyle and financial planning. The loan structure you choose now will shape your tax position, cash flow, and flexibility for years to come. Call one of our team or book an appointment at a time that works for you to talk through how your equity, income, and goals line up with the loan options available right now.

Frequently Asked Questions