The Pros and Cons of Holiday Home Loans

Buying a holiday home on the Mornington Peninsula or in a coastal area within reach of Hastings involves a different lending assessment to an owner-occupied purchase.

Lenders treat holiday homes as a separate category because they sit between investment properties and primary residences. You won't generate rental income like a traditional investment, but you also won't live there year-round. That dual-use nature affects how lenders calculate serviceability, what deposit they require, and which loan features make sense for your situation.

How Lenders Categorise Holiday Home Loans

Most lenders classify a holiday home as an investment property, even if you never rent it out. That means you'll typically need at least a 10% deposit, though some lenders require 20% to avoid Lenders Mortgage Insurance or to secure better pricing. The loan structure itself is usually an investment loan, but you apply owner-occupied thinking to how you use it.

Some lenders offer a holiday home loan category that sits between the two, which can provide access to slightly lower rates than a standard investment loan. Not all lenders offer this, so the application process often involves comparing how different lenders treat the property and which structure delivers the lowest cost over the time you plan to hold it.

Rental Income and Serviceability

If you plan to rent the property during peak summer months or school holidays, lenders will assess that income differently to a full-year tenancy. Most lenders apply a shading rate, which means they only count a portion of the projected rental income when calculating your borrowing capacity. For a holiday rental in Hastings or nearby coastal areas, that shading can be as high as 20% to 30%, depending on how seasonal the rental market is and how many weeks you intend to make it available.

Consider a buyer purchasing a two-bedroom unit near Hastings foreshore with plans to rent it for 12 weeks over summer. The rental income might generate reasonable returns during those weeks, but the lender will reduce that figure to account for vacancies, maintenance periods, and the fact that you'll use it personally for part of the year. The remaining income is then added to your existing salary or business income to determine how much you can borrow. If the rental income doesn't cover a significant portion of the loan repayment, the lender will assess the loan as though you're servicing it entirely from your primary income.

Offset Accounts and Loan Features for Holiday Properties

A linked offset account works well for a holiday home loan because it reduces the interest you pay during months when the property isn't generating income. If you save surplus cash in the offset, those funds reduce the balance on which interest is calculated, which can lower your repayments or help you pay down the loan faster.

Some buyers choose a split loan structure, fixing a portion of the loan to lock in repayments and leaving the remainder on a variable rate with an offset. This approach provides certainty around part of the repayment while maintaining flexibility to make extra repayments or access funds if needed. The variable portion also allows you to take advantage of rate discounts or redraw facilities without facing restrictions that come with most fixed rate products.

Tax Implications If You Rent the Property

Once you start renting the holiday home, even for short periods, the property becomes eligible for certain tax deductions. You can claim a portion of the interest on your home loan, council rates, insurance, and maintenance costs based on the percentage of time the property is genuinely available for rent. If you use it personally for half the year and rent it for the other half, you can typically claim 50% of those expenses.

The difficulty comes when you want to use the property at short notice during peak rental periods. If the property is listed as available but you block out weeks for personal use without a clear pattern, the Australian Taxation Office may reduce the claimable portion. Keeping records of when the property is advertised, when it's rented, and when you use it personally helps support your deduction claims and avoids issues during tax time.

Pros of Financing a Holiday Home

Borrowing to purchase a holiday home allows you to secure a property in an area you know well without needing to save the full purchase amount upfront. For buyers in Hastings, that might mean accessing beaches, boating, and the Western Port lifestyle without the higher price points in suburbs further up the Peninsula like Mount Eliza or Mornington.

If you choose to rent the property part-time, the rental income can offset some of the loan repayment, reducing the net cost of ownership. Over time, if property values increase, you also build equity in an asset that serves both lifestyle and financial goals. A portable loan structure can be useful if you decide to sell and purchase a different holiday property later, as it allows you to transfer the loan without reapplying or paying discharge fees.

Cons of Financing a Holiday Home

Carrying a second mortgage increases your overall debt, which can limit your borrowing capacity if you want to refinance your primary home or purchase another property. Lenders assess your ability to service both loans, so even if the holiday home generates some rental income, the additional repayment still factors into your financial position.

Maintenance and holding costs for a property you don't live in year-round can add up, particularly in coastal areas where salt air and weather exposure increase wear. If the property remains vacant for long periods, you're still responsible for council rates, insurance, utilities, and upkeep without rental income to cover those costs. Interest rate movements also affect your repayments, and if you've taken a variable rate loan, an increase in rates can push your repayment higher than anticipated.

Loan to Value Ratio and Deposit Requirements

Most lenders apply a maximum loan to value ratio of 90% for a holiday home, though some cap it at 80% depending on the property location and your financial profile. If you borrow above 80%, you'll usually pay Lenders Mortgage Insurance, which protects the lender if you default but adds to your upfront costs.

For buyers using equity in their primary residence to fund the deposit, the lender will assess the combined loan to value ratio across both properties. If your existing home has sufficient equity, you may be able to purchase the holiday home without contributing additional cash, though this increases the debt secured against your primary residence and should be weighed carefully.

You can explore your borrowing capacity before committing to a purchase, which helps clarify how much you can borrow across both properties and what deposit structure works within your budget. A home loan pre-approval also gives you certainty when making an offer, particularly in areas where properties move quickly during peak buying periods.

Should You Fix, Split, or Stay Variable?

Choosing between a variable rate, fixed rate, or split loan depends on how predictable you want your repayments to be and how much flexibility you need. A variable rate loan allows you to make extra repayments without penalty and gives you access to features like offset accounts and redraw facilities. If rates fall, your repayment decreases, though the reverse is also true.

A fixed interest rate home loan locks in your repayment for a set period, which can be useful if you want certainty around costs while managing two properties. The downside is that most fixed rate products limit extra repayments and charge break costs if you exit the loan early. A split loan gives you both, allowing you to fix part of the loan for stability and keep the rest variable for flexibility.

In our experience, buyers who plan to rent the holiday home occasionally tend to favour variable or split structures because they want access to offset accounts and the ability to pay down the loan faster when rental income comes in. Those who prefer predictable repayments and don't plan to make extra repayments often lean toward fixing a larger portion.

When a Holiday Home Loan Makes Sense

Financing a holiday property works well when you have stable income, a clear plan for how often you'll use the property, and realistic expectations about rental income. If you're already servicing a mortgage on your primary residence in Hastings or nearby, adding a second loan should leave you with enough buffer to handle rate rises or periods when the holiday home sits vacant.

The decision also depends on how long you plan to hold the property. If you're buying a coastal retreat you'll use for decades and eventually retire to, the loan structure should support that long-term goal. If you're purchasing as a shorter-term lifestyle choice with the option to sell in five to ten years, you'll want features that allow you to pay down the loan quickly or exit without significant penalties.

Call one of our team or book an appointment at a time that works for you to discuss how a holiday home loan fits with your current financial position and what loan features make sense for the way you plan to use the property.

Frequently Asked Questions