Common Mistakes When Buying a Holiday Home

Investment loan or owner-occupied loan?

You'll need an investment loan if you're buying a holiday home, even if you plan to spend every summer there.

Lenders classify properties by use, not by intent. If the property isn't your principal place of residence, it's treated as an investment. That affects your rate, your borrowing power, and the lender's serviceability calculation. Investment loan rates currently sit around 0.3% to 0.6% higher than owner-occupied rates, depending on the lender and your loan structure.

Consider a Castle Hill household earning $180,000 combined, looking to buy a coastal weekender while keeping their existing home. They assume their borrowing capacity will be similar to when they purchased their main residence a few years ago. It won't be. The lender applies a higher rate buffer to the new loan because it's an investment, assesses rental income at 80% if they plan to rent it out occasionally, and factors in the ongoing costs of holding two properties. Borrowing capacity typically drops by 15% to 25% compared with an owner-occupied scenario at the same income level.

Some buyers believe that saying they'll live in the property part-time will get them an owner-occupied rate. Lenders ask whether the property will be your principal place of residence. If the answer is no, the loan is structured as an investment loan, and attempting to misrepresent occupancy is mortgage fraud.

LVR limits are tighter for investment properties

Most lenders cap investment loans at 90% LVR, and some cap them at 80% or 85% depending on your deposit source and borrowing profile.

If you're borrowing above 80% LVR on an investment property, you'll pay lenders mortgage insurance. LMI premiums on investment loans are calculated on a steeper curve than owner-occupied loans at the same LVR. On a loan amount of $600,000 at 90% LVR, the LMI premium might sit around $18,000 to $22,000 for an investment loan compared with $15,000 to $18,000 for an owner-occupied loan, depending on the insurer and your profile.

If you're using equity from your Castle Hill home to fund the deposit, the lender will typically allow you to borrow up to 80% of your main property's value. Going beyond that limit means paying LMI on the amount above 80%, even if the holiday home loan itself sits below the LVR threshold. The LMI calculation applies to your total borrowing position, not each loan in isolation.

Split rate or variable rate for a property you'll hold long term?

Holiday homes are usually held longer than primary residences, and that changes how you should think about your loan structure.

A variable rate gives you flexibility to make extra repayments, redraw funds, and pay the loan down without penalty. A fixed rate locks in your repayment for a set period but typically comes with restrictions on extra repayments and early exit costs if you need to refinance or sell. A split loan lets you fix a portion of the balance and keep the rest variable, which works well if you want some rate certainty but don't want to lose access to offset or redraw features entirely.

In our experience, buyers who plan to rent their holiday home for part of the year tend to favour variable or split structures because rental income fluctuates and they want the option to pay down the loan faster during high-income periods. Buyers who plan to keep the property for personal use and can afford consistent repayments without relying on rental income sometimes lean toward a higher fixed portion, particularly if they're concerned about rate movements over the next two to three years.

Your loan structure also affects your tax position if you're renting the property out. Interest on the loan is deductible against rental income, but only if the loan is used to purchase or improve the investment property. If you redraw funds from the loan for personal use, that portion of the interest is no longer deductible, and separating the deductible and non-deductible components becomes a headache. A split loan with an offset account on the variable portion avoids that problem entirely.

Borrowing capacity takes a hit when you're holding two properties

Lenders assess your ability to service both your main home and the holiday home at the same time, and the calculation is tighter than most buyers expect.

Your existing home loan repayments are factored into your liabilities, along with the new loan repayments on the holiday home. If you're planning to rent the holiday property, lenders will typically assess 80% of the expected rental income, not 100%, to account for vacancy periods and management costs. If you're not renting it out, they'll assess your ability to service the full loan repayment from your salary alone.

Castle Hill buyers often underestimate how much their current mortgage affects their borrowing power for a second property. If your existing loan has a large balance or you're on a higher rate because you haven't refinanced recently, that repayment amount reduces how much you can borrow for the weekender. Running a loan health check on your current home loan before applying for a holiday home loan can open up $50,000 to $100,000 in additional borrowing capacity, depending on your circumstances.

Offset accounts don't work the same way on investment loans

An offset account on an investment loan reduces the interest you're charged, but it also reduces the interest you can claim as a tax deduction.

If you're buying a holiday home to rent out occasionally and you're parking cash in an offset account, you're reducing your deductible interest and increasing your after-tax cost. The benefit of an offset account is greatest when the loan is for your own home, not when the interest is deductible.

Some buyers use an offset account on their owner-occupied home loan and keep the investment loan separate without an offset, so they maximise their deduction on the holiday home and minimise interest on the property they live in. That structure makes sense if you've got surplus cash sitting in your offset and you're in a high tax bracket. If you're not earning rental income and you're not claiming deductions, the offset still works to reduce interest, but you lose the tax advantage.

Stamp duty and holding costs add up faster than you think

Stamp duty on a holiday home is calculated at standard investment rates in most states, and there are no concessions for first home buyers or owner-occupiers.

In New South Wales, stamp duty on a property valued at $700,000 is around $26,000. If you're buying in a high-demand coastal area near Castle Hill, such as the Central Coast, you'll pay that upfront at settlement. You'll also need to budget for council rates, water rates, strata fees if applicable, insurance, and ongoing maintenance. These costs don't pause when you're not using the property.

If you're renting the holiday home for part of the year, you'll need to account for property management fees, which typically run at 7% to 10% of the rental income, plus letting fees and advertising costs. If you're using the property yourself for more than a few weeks a year, your rental income will be lower, and your ability to offset holding costs through deductions will be limited. The ATO applies specific apportionment rules for properties used for both personal and income-producing purposes, and getting that wrong in your tax return creates problems down the track.

Choosing the right lender matters more than it does for a primary residence

Not all lenders treat holiday homes the same way, and some have specific policies that make them unsuitable depending on your situation.

Some lenders won't allow you to borrow if the property is in a regional or remote area, or if it's in a location they consider high-risk due to environmental factors such as flood zones or bushfire-prone areas. Some lenders apply higher interest rates or lower LVR caps for properties in certain postcodes. Some lenders won't lend on properties that are classified as short-term rental investments, such as those used exclusively for Airbnb or Stayz.

Castle Hill buyers looking at weekenders on the Central Coast or South Coast usually have access to a wide range of lenders, but buyers looking further afield or in smaller coastal towns may find their options limited. A mortgage broker in Castle Hill can identify which lenders will accept the property type and location before you waste time on an application that won't be approved.

Call one of our team or book an appointment at a time that works for you. We'll structure the loan to match how you plan to use the property, not just how much you want to borrow.

Frequently Asked Questions