Top tips to finance your holiday home

Financing a holiday home works differently to your first purchase

A holiday home loan is structured as an investment loan, even if you plan to use the property yourself. Lenders assess the application differently to owner-occupied lending because the property won't be your principal place of residence. That distinction changes the interest rate you'll receive, the deposit required, and how your income is assessed.

Consider a buyer in Warnbro who owns a home valued at $736,000 with a remaining mortgage of $420,000. They're looking at a coastal holiday property in Dunsborough priced at $750,000. The lender will assess their ability to service both loans simultaneously, factoring in their current mortgage repayments, the proposed new loan repayments, and all other financial commitments. Because the holiday property is classified as investment lending, the lender applies a serviceability buffer of at least 3.0 percentage points above the loan product rate and assesses rental income at a discount, even though the buyer intends to use the property themselves for several weeks each year.

The deposit and equity position you'll need

Most lenders require a minimum 10% deposit for a holiday home purchase, though many prefer 20% to avoid lenders mortgage insurance. If you're using equity in your existing Warnbro home rather than cash savings, the lender will assess the combined loan to value ratio across both properties.

In the scenario above, the buyer has $316,000 in equity in their Warnbro property. They plan to use $150,000 of that equity as the deposit and cover settlement costs for the Dunsborough purchase, leaving them with a new loan amount of $600,000 on the holiday property. The lender will calculate the total debt across both properties at $1,020,000 against combined property values of $1,486,000, producing an overall LVR of around 69%. That puts them in a comfortable position to proceed without LMI, assuming their income can service both loans.

If you're planning to access equity from your current home, a formal valuation may be required. Some lenders will accept an automated valuation model, but in suburbs where sales are less frequent or property types vary significantly, a physical valuation is often requested. Down to Earth Mortgage Broking can coordinate that process and confirm which lenders are currently accepting desktop valuations for properties in the Rockingham region, including Warnbro.

Variable, fixed or split: which structure suits a holiday home loan

You're not locked into a variable rate just because the loan is for a holiday property. Fixed rate, variable rate and split structures are all available, and the choice depends on how you plan to use the property and whether rental income will be part of the equation.

If you intend to rent the property out when you're not using it, a variable rate with an offset account linked to your everyday banking can help reduce interest costs while keeping your funds accessible. Any money sitting in the offset reduces the interest charged on the loan, which is fully deductible if the property generates rental income. A split structure can also work in this scenario, with part of the loan fixed for rate certainty and part variable with offset access.

If the property will be used purely for personal holidays with no rental activity, an offset account still provides value by reducing non-deductible interest. Fixed rates may appeal if you prefer predictable repayments, but you'll typically lose offset functionality on the fixed portion. Borrowers using a split rate structure can lock in a portion for stability and leave the remainder variable with offset access.

How rental income is assessed, even if you only rent occasionally

Lenders will only count rental income toward your servicing capacity if the property is genuinely available for rent and you can provide evidence of that rental activity or intention. If you plan to use the holiday home yourself for most of the year and rent it out for just a few weeks during peak season, the lender is unlikely to include that income in the assessment.

When rental income is counted, lenders typically apply a shading factor of 20% to account for vacancy periods and maintenance costs. So if the Dunsborough property could achieve $800 per week in rent and was available year-round, the lender would assess $640 per week as the net income for servicing purposes. If the property is only rented for six weeks over summer, that income is usually disregarded altogether, and the loan must be serviced entirely from your salary or business income.

This is where borrowing capacity becomes the deciding factor. If your current income can comfortably service both your existing home loan and the new holiday property loan without relying on rental income, the application moves forward. If the numbers are tight, the lender may decline or require a larger deposit to bring the loan amount down. We assess this upfront so you know whether the purchase is viable before you make an offer. You can read more about how that calculation works on our borrowing capacity page.

Interest-only versus principal and interest repayments

Interest-only repayments are available on holiday home loans and can reduce your monthly outgoings in the short term, but they don't build equity in the property. Some buyers use an interest-only structure for the first few years to keep repayments lower while they adjust to managing two properties, then switch to principal and interest repayments later.

If the property is being used for personal holidays only, you're still paying the loan with after-tax income, so reducing the loan balance sooner through principal and interest repayments usually makes sense. If the property is rented out and generating assessable income, the interest is tax-deductible, which can make an interest-only arrangement more appealing from a cash flow perspective, particularly if you're redirecting surplus funds to pay down non-deductible debt like your owner-occupied home loan.

There's no universal answer, but the structure should align with your broader financial position and tax circumstances. That's a conversation worth having with both your mortgage broker and your accountant before you settle on a loan structure.

What happens to your current home loan when you borrow again

Taking out a second loan doesn't automatically affect the terms of your existing home loan, but it does create an opportunity to review your current rate and structure. If your Warnbro home loan has been in place for several years and you haven't refinanced or negotiated a rate reduction, you may be paying more than necessary.

When applying for the holiday home loan, some buyers choose to refinance their existing home loan at the same time. This can consolidate the process, ensure both loans are with lenders offering strong ongoing rates, and sometimes provide access to offset accounts or other features that weren't available on the original loan. It also gives you a clean view of your total debt position and repayment obligations across both properties.

If your current lender offers a competitive rate and suitable loan features, you may choose to keep that loan in place and arrange the holiday home loan separately. Either approach works, but it's worth comparing your options before committing to a new loan, particularly if your circumstances or the lending market have shifted since your original purchase.

Stamp duty, settlement costs and ongoing holding costs

Stamp duty on a holiday home in Western Australia is calculated at the standard transfer duty rate because the property won't be your principal place of residence. There's no access to the First Home Owner Rate of duty or any other concession that applies to owner-occupied purchases. For a $750,000 property, stamp duty is approximately $27,990, and that cost needs to be paid at settlement.

You'll also need to budget for settlement costs including conveyancing fees, building and pest inspections, loan establishment fees, and any valuation costs required by the lender. Those costs typically add another $3,000 to $5,000 to the upfront expense.

Once you own the property, ongoing costs include council rates, water rates, insurance, property management fees if you rent the property out, and maintenance. These costs don't disappear during the periods you're using the property yourself, so they need to be factored into your budget from day one. If the property is rented, some of those costs are tax-deductible. If it's used purely for personal holidays, they're not.

Call Mel today

If you're considering a holiday home purchase and want to know how the numbers stack up for your situation, call Mel today or book an appointment at a time that works for you. We'll assess your borrowing capacity, compare loan options from lenders across Australia, and structure the finance to suit how you plan to use the property.

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