Buying a holiday home sounds appealing until you sit down with your lender and realise the approval process differs sharply from your owner occupied home loan.
Most lenders treat a second property as an investment, even if you plan to use it yourself most of the year. That classification changes your deposit requirement, your interest rate, and how rental income gets assessed. If you're a South Perth resident looking at a holiday property in the South West or along the coast, understanding these differences before you apply for a home loan will save you months of back and forth with lenders.
Lenders Assess Holiday Homes as Investment Properties
A holiday home is typically assessed as an investment property because it's not your principal place of residence. This means you'll need a larger deposit compared to an owner occupied home loan, usually at least 20% to avoid Lenders Mortgage Insurance (LMI). Even if you don't intend to rent the property out, lenders apply the same serviceability tests they use for investment loans, which are stricter than those for owner occupied borrowing.
Consider a buyer who owns a home in South Perth and wants to purchase a coastal property near Dunsborough. They have equity in their current home but assume they can borrow the same way they did for their first property. The lender requires a 20% deposit and applies a higher interest rate to the loan amount because the property isn't owner occupied. The buyer also discovers that their borrowing capacity is lower because the lender discounts any projected rental income and applies a higher assessment rate to the new loan.
Rental Income Is Heavily Discounted for Serviceability
If you plan to rent out your holiday home occasionally to offset costs, lenders will factor in that income, but not at full value. Most lenders apply a discount of 20% to 30% on projected rental income to account for vacancy periods, maintenance, and management fees. Some lenders won't consider rental income at all if you can't demonstrate a history of tenancy or a signed lease.
In the Dunsborough example, the buyer estimates the property could generate $30,000 per year through short term holiday rentals. The lender applies a 25% discount, meaning only $22,500 is included in the serviceability calculation. That reduction lowers the buyer's borrowing capacity by around $50,000, forcing them to either increase their deposit or choose a lower priced property. This is a common issue for holiday home buyers who underestimate how lenders treat intermittent rental income.
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Deposit and Equity Options for a Second Property
You can fund a holiday home deposit in several ways. Cash savings are the most straightforward, but many buyers use equity from their existing home. If your South Perth property has increased in value, you may be able to access that equity without selling. Lenders typically allow you to borrow up to 80% of your home's current value, minus what you still owe on your mortgage.
Using equity means you avoid drawing down your cash reserves, but it also increases your overall debt and the monthly repayments across both properties. A mortgage broker in South Perth can help you compare home loan options and structure the borrowing so you're not overextending. Some buyers also consider a split loan, where part of the loan is on a fixed interest rate and part remains on a variable rate, giving them some protection against rate movements while maintaining flexibility.
Interest Only Repayments Might Suit Short Term Ownership
Interest only loans are common for investment properties because they keep repayments lower in the early years. Instead of paying down the principal, you only cover the interest, which can improve cash flow if rental income is inconsistent. However, you're not building equity during the interest only period, and when it ends, your repayments will increase significantly as you switch to principal and interest.
This structure works if you plan to sell the holiday home within a few years or if you expect your income to rise. It's less suitable if you want to own the property long term and reduce debt. Lenders usually offer interest only periods of one to five years, after which the loan reverts to principal and interest repayments. Make sure you understand how the repayment shift will affect your budget before committing to this loan feature.
Offset Accounts and Loan Portability Add Flexibility
An offset account linked to your holiday home loan can reduce the interest you pay without locking funds away. Any balance in the offset account is deducted from your loan balance before interest is calculated, which can save thousands over the life of the loan. This feature is particularly useful if you receive rental income in bursts or if you're holding cash for renovations or repairs.
Portability is another feature worth considering if you might sell the holiday home and buy a different one in future. A portable loan lets you transfer your existing home loan to a new property without reapplying or paying discharge fees. Not all lenders offer this, so if flexibility matters to you, make it part of your comparison when choosing a home loan product.
Pre Approval Helps You Avoid Pricing Surprises
Getting home loan pre approval before you start looking gives you a clear budget and shows sellers you're a serious buyer. Pre approval is based on your income, existing debts, and the deposit you have available. For a holiday home, lenders will also consider your current mortgage repayments and any rental income from the new property.
Pre approval typically lasts three to six months, giving you time to find the right property without the pressure of arranging finance at the last minute. If you're buying in a competitive area like Margaret River or Rottnest, having pre approval can make the difference between securing a property and missing out. You can access home loan options from banks and lenders across Australia through a broker, which broadens your choices and often results in a lower interest rate or a rate discount depending on your loan to value ratio.
Capital Gains Tax Applies When You Sell
Unlike your primary residence, a holiday home is subject to capital gains tax when you sell. The tax is calculated on the profit you make, and while you can reduce it by holding the property for more than 12 months, it's still a significant cost that many buyers overlook. This is particularly relevant if you plan to sell the property within a few years or if you're buying in an area with strong price growth.
You can't avoid capital gains tax by claiming the holiday home as your primary residence unless you actually move in and make it your main home for a period. If you're buying the property as part of a longer term plan to build equity or generate passive income, factor in the tax liability when calculating your return on investment.
Structuring the Loan Across Multiple Properties
If you already have a home loan on your South Perth property, adding a second loan for a holiday home increases complexity. Some buyers choose to refinance both properties under a single lender to simplify repayments and potentially secure a lower rate across both loans. Others keep the loans separate to maintain flexibility, especially if one property is on a fixed rate and the other is variable.
There's no single right answer, but the structure you choose affects your repayments, your ability to access equity later, and how you manage interest rate changes. A broker can model different scenarios and show you how each option impacts your monthly costs and long term financial position. If you're also considering investment loans for other properties down the track, structuring your holiday home loan correctly now makes future borrowing much smoother.
Call one of our team or book an appointment at a time that works for you to talk through your options and get a clear picture of what's possible with your current financial position.
Frequently Asked Questions
Do I need a bigger deposit for a holiday home loan?
Yes, most lenders require at least 20% deposit for a holiday home because it's assessed as an investment property rather than owner occupied. If you borrow with less than 20% deposit, you'll likely pay Lenders Mortgage Insurance, which increases your upfront costs.
Can I use equity from my South Perth home to buy a holiday property?
You can use equity from your existing home as a deposit for a holiday property, provided you have enough available equity and your income supports the additional borrowing. Lenders typically allow you to borrow up to 80% of your home's value, minus your current mortgage balance.
Will lenders count rental income from a holiday home?
Lenders will consider rental income, but they usually apply a discount of 20% to 30% to account for vacancies and expenses. Some lenders require evidence of a lease or rental history before including the income in their serviceability assessment.
Should I choose a fixed or variable rate for a holiday home loan?
It depends on your risk tolerance and plans for the property. A fixed interest rate home loan gives you repayment certainty, while a variable rate offers flexibility and potential access to features like an offset account. A split loan combines both options.
Do I pay capital gains tax when I sell a holiday home?
Yes, capital gains tax applies to holiday homes because they're not your primary residence. The tax is calculated on the profit from the sale, though holding the property for more than 12 months may reduce the amount owed.
