Holiday Home Loans and What Not to Overlook

A holiday home sits somewhere between an owner-occupied property and an investment. You might spend summer weekends there and rent it out over winter, or keep it exclusively for family use. Either way, lenders and the ATO both care about how you intend to use the property, and that classification shapes your loan structure, interest rate, and tax position from day one.

How Lenders Classify a Holiday Home

Lenders generally treat a holiday home as an investment property unless you intend to occupy it as your principal place of residence for more than half the year. If you plan to use the property occasionally and leave it vacant the rest of the time, it will be assessed as an investment loan. If you intend to generate rental income, even for part of the year, it will also be classified as investment. This matters because investment loans typically attract a higher interest rate than owner-occupied loans, usually between 0.20% and 0.50% depending on the lender and your deposit size.

Consider a buyer in Castle Hill purchasing a coastal property near Terrigal with the intention of using it four weeks a year and leaving it vacant otherwise. The lender will assess that purchase as investment lending. The buyer will pay investment loan rates and be subject to investment serviceability calculations, even though they have no intention of generating rental income. That classification also means they cannot claim a deduction for interest or other costs unless they change their usage and begin renting the property.

Serviceability Is Tighter on a Second Property

When you apply for a home loan to purchase a holiday home while still holding your primary residence, the lender assesses your ability to service both loans simultaneously. If your existing home loan has a linked offset or redraw facility with accumulated savings, the lender may take that into account as a buffer, but they will still apply the 3.0 percentage point serviceability buffer to the new loan and assess your income against both commitments. If you plan to rent the holiday property, lenders will typically include 80% of the expected rental income in their serviceability assessment, not the full amount.

A borrower earning $150,000 and holding a $600,000 loan on their Castle Hill home may find their borrowing capacity for a holiday home is materially lower than they expected, particularly if they have other ongoing commitments such as car finance or investment debt. Running the numbers with a broker before you start searching gives you a realistic price range and helps avoid disappointment once you've found a property you want to proceed with.

Loan Structure Options That Suit Part-Year Use

Most buyers purchasing a holiday home choose a variable rate loan or a split structure with part fixed and part variable. A fully fixed loan can work if you want certainty over repayments and have no intention of paying down the loan early, but flexibility is often more valuable for a second property. If you decide to sell the holiday home or redirect funds from your offset account, a variable loan gives you that option without triggering break costs.

An offset account linked to the holiday home loan can be particularly useful if you use the property intermittently. Any funds sitting in the offset reduce the interest charged daily, and you retain access to those funds if you need them for maintenance, rates, or other costs associated with the property. If you later decide to rent the property and claim a tax deduction for interest, the offset structure ensures you're not prepaying the loan in a way that reduces your deductible interest.

Tax Treatment Depends on How You Use the Property

If you purchase a holiday home and use it exclusively for private purposes, you cannot claim any deductions for interest, council rates, insurance, or other holding costs. If you rent the property for part of the year and use it privately for the rest, you can claim a deduction for expenses that relate to the period it was rented or genuinely available for rent. The ATO expects you to apportion costs based on actual usage, and they pay close attention to properties that are claimed as available for rent but generate little or no income.

A property at Nelson Bay that is rented for 20 weeks over summer and used privately for four weeks at Christmas would allow you to claim a deduction for interest and other costs for the 20 weeks it was tenanted, plus any period it was genuinely advertised and available between tenancies. The private use period and any time the property was not genuinely available for rent would be non-deductible. Keeping records of advertising, booking platforms, and actual rental agreements helps support your apportionment if the ATO ever requests it.

If you've held investment property before, you'll be familiar with the principle that interest is only deductible to the extent the borrowed funds are used to generate assessable income. That same principle applies to a holiday home used partly for private purposes and partly for income.

Lending Policy on Short-Term Rental Income

If you plan to rent your holiday home through platforms such as Airbnb or Stayz, some lenders will include that income in their serviceability assessment and others will not. Lenders who do accept short-term rental income typically require evidence of forward bookings or a rental appraisal, and they will apply a discount to the projected income to account for vacancies, cancellations, and seasonality. That discount is often more conservative than the 20% reduction applied to long-term residential leases.

A lender assessing a loan for a property in the Blue Mountains that generates short-term holiday income may accept 70% of the annualised rental figure, or they may exclude the income altogether and assess the loan based on your salary alone. Knowing which lenders will include that income and which will not is one of the areas where working with a mortgage broker makes a material difference to your borrowing capacity and loan options.

Deposit Requirements and Lenders Mortgage Insurance

Most lenders will lend up to 90% of the property value for an investment loan secured against a holiday home, but you will pay LMI on any loan above 80% LVR. Some lenders cap their maximum LVR at 85% or 80% for investment property, particularly if you already hold multiple loans. If you have sufficient equity in your primary residence, you may be able to use that equity as security rather than providing a cash deposit, but the combined LVR across both properties will still determine whether LMI applies.

LMI premiums are calculated on a sliding scale based on the loan amount and LVR, and the premium can add several thousand dollars to your upfront costs. If you're close to the 80% threshold, it's worth considering whether a slightly larger deposit or a smaller loan amount would bring you under that line and eliminate the need for LMI altogether. For residents in Castle Hill where property values have grown consistently, refinancing or restructuring your existing home loan to access equity might provide the deposit you need without selling other assets.

Capital Gains Tax on Sale

Your primary residence is generally exempt from capital gains tax under the main residence exemption, but a holiday home does not qualify for that exemption unless it was your principal place of residence for the entire period you owned it. If you use the holiday home exclusively for private purposes and never rent it out, the gain on sale will still be subject to CGT, though you will receive the 50% discount if you've held the property for more than 12 months.

From 1 July 2027, the 50% CGT discount on residential property is replaced by cost base indexation and a 30% minimum tax rate on gains accruing from that date, as set out in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026. If you purchase a holiday home now and sell it in future, the gain will be apportioned between the period before and after 1 July 2027, with different tax treatment applying to each portion. Buyers purchasing with a long-term hold in mind should factor that change into their planning, particularly if they expect strong capital growth over the next decade.

If you've used the property to generate rental income for part of your ownership, the cost base and apportionment calculations become more complex, and it's worth engaging an accountant who understands the interaction between private use, rental periods, and the updated CGT rules.

Choosing a Loan That Reflects How You'll Actually Use the Property

The structure you choose at the outset should reflect your intended use, but it also needs to accommodate the possibility that your plans might change. A buyer who initially intends to keep a holiday home for private use might decide two years later that renting it out over peak season makes financial sense. If the loan is structured with an offset account and variable rate from the beginning, that transition is straightforward. If the loan is fixed with no offset and you've been making extra repayments into a redraw facility, you may face complications with deductibility and interest apportionment.

Talking through your intended use and your backup options during the application process ensures the loan structure supports both scenarios. If you're weighing up whether to purchase a holiday home or a traditional investment property, comparing the two side by side, including loan rates, tax treatment, and cash flow, helps clarify which option suits your circumstances and long-term goals.

Call one of our team or book an appointment at a time that works for you. We'll walk through your current position, your plans for the property, and the loan structures and lenders that align with how you intend to use it.

Frequently Asked Questions