Understanding the basics of holiday home loans

Purchasing a holiday home while retaining your main residence

A holiday home loan is treated as an investment loan by lenders, regardless of whether you plan to rent it out or use it exclusively for personal holidays. Most lenders will assess the property as an investment from day one because it will not be your principal place of residence.

In our experience, NDIA employees are often surprised that lending criteria differ considerably between owner-occupied and investment purchases. The classification matters because it affects the interest rate you'll be offered, the deposit size you'll need, and how your borrowing capacity is calculated. For public sector employees with stable income, these differences are manageable, but they require planning ahead of any property search.

Consider a scenario where an NDIA employee with an existing home in Canberra wants to purchase a coastal property in Batemans Bay. The employee has $80,000 in savings and an offset account attached to their current home loan. The coastal property is priced within the employee's budget, but the employee assumes the same deposit percentage used for the Canberra purchase will apply. That assumption often leads to confusion once serviceability and LVR calculations are explained. Because the Batemans Bay property will be classified as an investment, the lender applies a higher interest rate buffer during the serviceability assessment and typically requires a larger deposit to avoid LMI or to keep the loan within acceptable risk parameters. The same employee may have qualified for a 10% deposit on an owner-occupied property but will likely need 15% to 20% for the investment property to stay within similar LVR and cost structures.

What deposit will lenders require for a holiday home?

Most lenders require a minimum 10% deposit for investment properties, though 20% is more common if you want to avoid paying LMI. Some lenders will lend at higher LVRs, but LMI premiums increase significantly once you exceed 80% LVR on an investment loan.

If you're using equity from your existing home rather than cash savings, the same LVR principles apply across both properties. Lenders will calculate the combined loan-to-value ratio and assess whether the total debt sits within their risk appetite. We regularly see NDIA employees with strong equity positions in their primary residence but limited cash savings. In that scenario, equity release can be structured to fund the deposit and associated costs without requiring a full sale or refinance of the main property. That approach works well when your current home loan is on competitive terms and you want to avoid disturbing it unnecessarily.

Interest rates and loan structures for investment properties

Investment loan rates are typically 0.20% to 0.40% higher than equivalent owner-occupied rates, depending on the lender and your overall credit profile. That margin reflects the higher risk weight lenders assign to investment lending under APRA's prudential framework.

You can choose between variable, fixed, or split rate structures. Variable rates give you the flexibility to make extra repayments and access features like offset accounts without restriction. Fixed rates lock in your repayment amount for a set term, typically between one and five years, but often come with limited offset functionality and restrictions on additional repayments. A split rate divides your loan between fixed and variable portions, allowing you to manage interest rate risk while retaining some flexibility. We regularly see NDIA employees opt for a 50/50 split when they want rate certainty on part of the loan but also want to continue building equity through an offset account on the variable portion.

How lenders assess serviceability for a second property

Lenders assess your ability to service both your existing home loan and the new investment loan simultaneously. They apply a serviceability buffer of at least 3.0 percentage points above the loan product rate and calculate rental income at a discount, typically 80%, to account for vacancy periods and maintenance costs.

If you plan to use the holiday home exclusively for personal use and will not generate any rental income, lenders assess the loan as though it were a non-income-producing investment. That means your salary and other income sources must cover the full repayment amount on both loans, plus your living expenses, at the buffered interest rate. For NDIA employees on permanent full-time contracts, stable income works in your favour, but the absence of rental income reduces your overall borrowing capacity compared to a scenario where the property is tenanted year-round.

As an example, an NDIA employee earning $95,000 with an existing mortgage of $420,000 and monthly repayments of $2,600 applies for a second loan of $500,000 to purchase a holiday home. The lender buffers the new loan at 9.5% (assuming a product rate of 6.5% plus the 3.0 percentage point buffer) and calculates a monthly repayment of approximately $4,200 for assessment purposes. The employee's after-tax income is roughly $6,200 per month. After deducting the existing mortgage repayment, the buffered repayment on the new loan, and an allowance for living expenses based on the Household Expenditure Measure, the lender determines that serviceability is tight but achievable. If the employee intended to rent the property for part of the year and could demonstrate rental income of $400 per week, the lender would include 80% of that income in the assessment, improving serviceability and potentially increasing the borrowable amount.

Tax treatment and negative gearing considerations

If you rent out your holiday home for any part of the year, you can claim a deduction for interest, rates, insurance, maintenance, and other expenses in proportion to the period the property is available for rent. If you use the property exclusively for personal holidays and do not rent it out, no deductions are available.

For properties purchased before 7:30pm AEST on 12 May 2026, losses from the investment property can be deducted against your salary and other income. For established properties purchased after that date, losses can only be deducted against other residential property income, including capital gains, from the 2027-28 income year onward. New builds purchased after 12 May 2026 retain the ability to deduct losses against all income. These rules are set out in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received royal assent on 26 June 2026. The tax treatment of your holiday home depends on when you purchased it, whether it is a new or established dwelling, and how you use it throughout the year.

Can you use government schemes for a holiday home purchase?

No, you cannot use the Australian Government 5% Deposit Scheme or the Help to Buy scheme for a holiday home. Both schemes are restricted to properties that will be your principal place of residence. State and territory first home buyer grants and stamp duty concessions also require the property to be owner-occupied and cannot be used for investment or holiday properties.

If you already own your primary residence, you are not eligible for first home buyer assistance on a second property. Some NDIA employees ask whether they can treat the holiday home as their primary residence to access these schemes, but lenders and revenue authorities require evidence of genuine occupancy, and misrepresenting your intentions can result in penalties, claw-back of concessions, and potential fraud allegations. The schemes are designed to support entry into home ownership, not the acquisition of additional properties.

Loan features that suit holiday home buyers

An offset account linked to your holiday home loan can reduce the interest you pay by offsetting your savings balance against the loan principal. If you plan to use the property seasonally and will have periods of higher cash flow between holidays, an offset account allows you to park those funds and reduce interest costs without making permanent extra repayments.

Portability is another feature worth considering. If you decide to sell the holiday home and purchase a different property, a portable loan allows you to transfer the existing loan to the new property without paying discharge fees or reapplying from scratch. Not all lenders offer portability on investment loans, so it's worth confirming at the time of application if you think your plans might change over the next few years.

Redraw facilities allow you to access extra repayments you've made on the loan, which can be useful if you need funds for maintenance or improvements to the holiday property. Some lenders restrict redraw on fixed rate loans, so if you plan to make extra repayments and want the option to access those funds later, a variable rate loan or the variable portion of a split loan is the better choice.

When does it make sense to refinance an existing loan to fund the holiday home?

If your current home loan has a rate that is no longer competitive, refinancing the entire debt and releasing equity at the same time can be more cost-effective than taking out a separate second loan. Refinancing also gives you the opportunity to restructure your loans, split the debt into owner-occupied and investment portions, and ensure each loan is optimised for its purpose.

We regularly work with NDIA employees who have been with the same lender for five or more years and are paying higher rates than they would receive as a new customer. In that scenario, refinancing both the existing home loan and the new investment loan together often results in a lower blended rate, reduced monthly repayments, and improved loan features such as offset accounts on both facilities. Some lenders also offer relationship discounts when you hold multiple loans with them, which can further reduce the rate on your investment loan.

Call one of our team or book an appointment at a time that works for you. We'll walk through your current position, run the serviceability scenarios, and make sure the structure you choose fits both your holiday plans and your long-term financial position.

Frequently Asked Questions