Do you know how a holiday home loan actually works?

A holiday home loan works differently to the loan you used for your primary residence.

The deposit requirements shift, the way lenders assess your income changes, and the loan structure you choose affects both your tax position and your ability to use the property when you want it. If you're weighing up whether to buy something along the coast or in the hills while still living in Mentone, understanding how lenders treat a second property makes the difference between a straightforward approval and months of back and forth.

How much deposit do you actually need for a holiday home?

Most lenders require a 20% deposit for a second property, though some will lend with 10% if you're prepared to cover Lenders Mortgage Insurance. Your primary residence equity can be used as part or all of that deposit, which means you may not need to save additional cash if you've built enough equity in your Mentone home. The lender calculates usable equity as 80% of your home's current value minus what you owe, so a property valued at $1,200,000 with a $600,000 loan balance gives you $360,000 in accessible equity. You can use that equity toward the deposit and purchase costs on a holiday property without selling or refinancing your existing home, though the lender will assess whether your income supports both loans comfortably.

Consider a couple who own a home in Mentone worth $1,150,000 with $550,000 still owing. They want to purchase a holiday property on the Mornington Peninsula for $750,000. Their usable equity sits at $370,000, which more than covers the 20% deposit of $150,000 plus stamp duty and purchase costs. The lender structures this as a split loan, with one portion secured against the Mentone property and the other against the new holiday home, keeping the debt separated for tax and future sale purposes.

Does rental income count toward your borrowing capacity?

Lenders will include rental income from your holiday home in their serviceability assessment, but they don't count every dollar you expect to earn. Most lenders apply a shading factor of 70% to 80%, meaning if you project $30,000 in annual rental income, the lender might only assess $21,000 to $24,000 when calculating whether you can service both loans. This shading accounts for vacancy periods, management fees, and seasonal fluctuations. If you plan to use the property yourself for part of the year, some lenders reduce the shading further or won't count rental income at all unless you can demonstrate a consistent letting history or a signed management agreement with realistic occupancy rates for that location.

The way you structure the loan also changes your tax treatment. An investment loan set up as interest-only keeps your repayments lower and maximises your tax deductions if you're renting the property out, even part time. If you're planning to use the holiday home purely for personal use with no rental income, you'll need to service the loan entirely from your current income, which tightens your borrowing capacity and pushes most buyers toward a principal and interest structure on an owner occupied home loan.

Can you use an offset account on a holiday home loan?

You can link an offset account to a holiday home loan, but whether it makes sense depends on how you're using the property. If the holiday home is rented out and you're claiming interest as a tax deduction, parking savings in an offset account reduces your loan balance and cuts the amount of interest you can claim. That works against you. If the property is for personal use only and you're not claiming deductions, an offset account works the same way it does on your primary home, reducing the interest you pay without affecting your tax position.

A split loan structure gives you flexibility if you're doing both. You might fix part of the holiday home loan to lock in repayments during the years your income is highest, and keep the rest variable with an offset attached. That way you can still access your savings, reduce interest on the variable portion, and claim the full deduction on the fixed portion if you decide to rent the property out later. Portability also matters if you think you'll sell the holiday home and buy another one within a few years. A portable loan lets you transfer the balance to a new property without reapplying or paying discharge fees, which keeps the process faster and your rate discount intact.

What happens when you want to sell your primary home and move into the holiday property?

If you sell your Mentone home and move into the holiday property as your new primary residence, the loan structure needs to change. The lender will want to switch the loan from investment to owner-occupied, which often comes with a lower rate. You'll need to notify the lender and update your loan terms, and this is also when capital gains tax becomes relevant. The property stops being your main residence from the date you first rented it out or used it to produce income, so if you've been claiming deductions for a few years and then move in, the ATO will calculate CGT on the period it was used as an investment. You can't avoid this by simply changing the loan category, but structuring it correctly from the start and keeping your records in order makes the transition much cleaner when it happens.

In our experience, buyers who plan to retire into a holiday property within five to ten years often set the loan up as owner-occupied from day one and avoid renting it out, even if that means tighter serviceability. The trade-off is a slightly higher interest cost now in exchange for no CGT liability later and the freedom to move in whenever they're ready without needing ATO advice or lender approval.

Does the location of the holiday home affect your borrowing options?

Some lenders restrict lending in certain regional or remote postcodes, especially for properties that rely on short-term holiday rental income. A beachside apartment in Portsea or Sorrento will generally have more lender options than a rural property in far Gippsland, even if the purchase price is similar. Lenders assess both the property's resale value and the strength of the local rental market when deciding whether to approve the loan. If the area has limited year-round demand or the property type is unusual, you may find yourself limited to a smaller panel of lenders or facing a higher rate.

This is also where a broker becomes useful. Access to a wider panel means you're not stuck with whatever your current bank offers, and regional lending policies vary enough that one lender might decline a property while another approves it without hesitation. If you're weighing up a few different locations or property types, working through your borrowing capacity and serviceability across a few scenarios before you make an offer keeps you from committing to something that won't settle.

If you're thinking about adding a holiday home while keeping your Mentone property, call one of our team or book an appointment at a time that works for you. We'll walk through your equity position, compare loan structures, and make sure the numbers work before you start looking.