Unlock the secrets to financing your holiday home

Working out how much equity you can use

You can typically borrow against up to 80% of your main property's value without needing to pay Lenders Mortgage Insurance. If your owner occupied home is worth more now than when you bought it, the difference between what you owe and that 80% threshold is equity you might be able to access. Consider someone who bought in Newtown a decade ago for $800,000 and still owes $400,000 on that loan. If the property is now valued at $1.2 million, they could potentially access around $560,000 in usable equity ($1.2 million x 80% minus the $400,000 debt). That figure becomes the starting point for understanding what's realistic when you're looking at holiday home options.

Lenders assess the holiday property as a separate security, so you'll need enough equity to cover the deposit plus the costs that come with buying a second property. Settlement costs, stamp duty, and transfer fees all need to be accounted for before you know what's left for the purchase itself. We regularly see buyers focus on the deposit and forget that stamp duty in NSW alone can add tens of thousands depending on where you're buying.

How lenders assess a holiday home loan application

A holiday home is typically assessed as an owner occupied purchase if you genuinely intend to use it yourself rather than rent it out. That means you'll usually access owner occupied home loan rates rather than investment rates, which tends to keep your interest rate lower. Lenders will still assess your borrowing capacity by looking at your income, existing debts, and living expenses, but they treat the second property as additional debt rather than an income-producing asset.

Your borrowing capacity shrinks when you're carrying two mortgages at once. Some lenders apply stricter serviceability buffers to holiday home applications because they know you're juggling repayments on two properties without rental income to offset the cost. If you're planning to keep your current variable rate on the main property and take out a new loan for the holiday home, the lender will assess whether you can service both loans at a higher interest rate than what you'd actually pay. That buffer is usually around 3%, so even if the current variable rates sit at 6.5%, the lender might assess you as if you're paying 9.5%.

Should you use a separate loan or refinance everything together

You can either refinance your existing home loan to release equity and secure a new loan for the holiday property, or keep your current loan untouched and take out a standalone second mortgage. Refinancing everything together can sometimes unlock a better rate discount if you're consolidating a larger loan amount with one lender, but it also means breaking your current loan structure. If you're on a fixed rate that still has time to run, break costs can wipe out any rate advantage you might gain by switching. In our experience, most people who already have a solid rate on their main property prefer to leave it alone and take out a separate loan for the holiday home.

A split loan structure can work well if you want some certainty around repayments but don't want to lock in the entire loan amount. You might fix half the holiday home loan to cover your baseline repayments and keep the other half variable so you can pay it down faster without penalty. Alternatively, keeping one loan as variable rate and the other fixed gives you flexibility across both properties rather than within a single loan. It depends on how you want to manage risk and whether you're likely to sell either property in the next few years.

What an offset account does when you're managing two loans

An offset account linked to your holiday home loan reduces the interest you pay by offsetting your savings balance against the loan amount. If you have $30,000 sitting in an offset and your loan balance is $500,000, you only pay interest on $470,000. That setup works particularly well for a holiday property because you're not living there full-time, so holding surplus cash in the offset instead of making extra repayments gives you access to those funds when you need them for maintenance, rates, or other property costs.

Not all lenders offer a full 100% linked offset, and some charge a higher interest rate or annual fee to include that feature in the loan package. You'll want to compare whether the interest you save outweighs any additional costs. If the holiday home loan is relatively small or you don't have much surplus cash to park in the offset, the feature might not be worth paying extra for. But if you're holding a decent buffer or plan to use the property as a future income source, an offset account can help you build equity faster without locking funds away.

How location affects your loan options for a coastal property

Some lenders treat coastal properties differently, especially if the area is prone to flooding, bushfire risk, or has limited infrastructure. A holiday home on the NSW South Coast near Batemans Bay or Narooma might be flagged for postcode restrictions by certain lenders, which can limit your loan options or mean you need a larger deposit. Other lenders don't apply those restrictions as strictly, so working with someone who knows which lenders will touch a particular area saves you applying to the wrong one and getting knocked back.

As an example, a buyer looking at a property in a bushfire-prone zone near the Blue Mountains might find that one lender requires 15% deposit instead of 10%, while another won't lend there at all. If you've already got your heart set on a location, it's worth checking lender appetite before you make an offer. We've seen buyers assume their equity position is strong enough to get any loan over the line, only to find out the property itself is the issue, not their finances.

Interest only repayments and whether they suit a holiday home

Interest only repayments mean you're only covering the interest portion of the loan each month, not paying down the principal. That keeps your repayments lower in the short term, which can help with cash flow when you're managing two mortgages. Some buyers use this option for the first few years while they get comfortable with the additional debt, then switch to principal and interest once their income improves or they've paid down more of their main home loan.

The trade-off is that you're not building equity in the holiday property during the interest only period, so if property values don't increase much or you need to sell within a few years, you might not see any capital gain. Lenders usually offer interest only terms of up to five years on owner occupied loans, and you'll need to demonstrate that you can afford the higher principal and interest repayments once that period ends. If your plan is to eventually rent the property out or sell it before retirement, interest only might make sense. If you're planning to keep it long-term and pass it on, paying down the principal from the start tends to work out better.

Using equity from your holiday home to invest later

Once you've owned the holiday property for a while and built up some equity, that property can become a source of funds for future purchases. If values increase and you pay down the loan, you might be able to access that equity to buy an investment property or fund a renovation on your main home. The process works the same way as releasing equity from your first property, but lenders will assess your borrowing capacity based on all the debt you're already carrying.

Some buyers treat the holiday home as a stepping stone to a larger property portfolio, while others just want the option to access funds if they need them down the track. Either way, building equity in a second property gives you more flexibility than renting a holiday house every year without any asset to show for it. The key is making sure the repayments are manageable now, so you're not stretching yourself too thin before you've even thought about what comes next.

If you're thinking about how to structure a loan for a holiday property or want to know how much equity you can actually use, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions