10 Ways to Finance a Holiday Home in Oakleigh South

Structuring Your Loan as Owner-Occupied or Investment

Your holiday home loan structure depends on whether you'll rent the property out. If you plan to keep the property solely for personal use, you'll apply for an owner-occupied home loan. If you intend to generate rental income when you're not using it, the loan becomes an investment loan with a slightly higher interest rate but tax-deductible interest costs.

Consider a buyer from Oakleigh South who purchases a coastal property in Inverloch. They plan to use it during school holidays and over summer but want to rent it out through platforms like Airbnb during peak periods to offset costs. Because the property generates rental income, the lender will classify this as an investment loan. The interest rate sits around 0.3% to 0.5% higher than owner-occupied rates, but the interest becomes tax-deductible, and they can claim depreciation and property management costs. The rental income also helps service the loan, which improves their borrowing capacity.

Many Oakleigh South families drawn to the Mornington Peninsula or Phillip Island face this decision. If you want flexibility to rent the property occasionally without immediately restructuring your loan, discuss your intentions with your broker during the home loan application process.

Using Equity from Your Oakleigh South Home

Most buyers purchasing a holiday home don't start from scratch. They use equity built up in their primary residence to fund the deposit and costs for the second property.

Equity is the difference between what your home is worth and what you owe on it. Properties in Oakleigh South, particularly those near Huntingdale Golf Club or within walking distance of Oakleigh South Primary School, have seen solid value growth over the past decade. If your home has increased in value or you've paid down your mortgage, you may be able to borrow against that equity without selling.

Lenders typically allow you to access up to 80% of your property's value without paying Lenders Mortgage Insurance (LMI). If your Oakleigh South home is valued higher than when you purchased it and your loan balance has reduced, you can apply for equity release to fund your holiday home deposit. The equity portion is added to your existing home loan or structured as a separate split, and you'll need to demonstrate that you can service both loans comfortably.

Split Rate Structures for Holiday Properties

A split loan lets you divide your borrowing between fixed and variable portions, which can work particularly well for holiday homes where future plans may shift.

You might fix 50% to 70% of the loan to lock in repayment certainty and keep the remainder on a variable rate with an offset account. The variable portion gives you flexibility to make extra repayments or pay the loan down faster if you decide to sell your primary residence and move into the holiday home later. The fixed portion protects you if rates rise during the period you're balancing two mortgages.

This structure also suits buyers who anticipate receiving a windfall, such as an inheritance or bonus, within a few years. The variable split allows you to make lump sum repayments without incurring break costs, while the fixed portion keeps your minimum repayments predictable.

Interest-Only Repayments to Manage Cash Flow

Interest-only repayments reduce your monthly commitment by deferring principal repayments for a set period, usually up to five years. For investment holiday homes, this structure can improve short-term cash flow while you establish a rental income pattern.

Under an interest-only arrangement, you're only paying the interest charged on the loan each month. Your loan balance doesn't reduce, but your repayments are lower. Once the interest-only period ends, the loan reverts to principal and interest, and your repayments increase to ensure the loan is repaid over the remaining term.

This approach suits buyers who expect their income to increase, plan to sell another asset, or want to direct surplus cash toward their primary residence mortgage or other investments in the meantime. It's less common for owner-occupied holiday homes but can still be arranged if your financial situation supports it.

Offset Accounts and Holiday Home Loans

An offset account linked to your holiday home loan reduces the interest you're charged by offsetting your savings balance against the loan balance. If you have a variable rate home loan with a loan amount of $400,000 and $30,000 sitting in your offset, you're only charged interest on $370,000.

This feature is particularly useful for holiday homes because your spending patterns are less predictable. You might accumulate savings during the year and then draw them down for maintenance, rates, or holiday expenses. Rather than keeping that money in a separate savings account earning minimal interest, the offset account reduces your interest costs and keeps your funds accessible.

Offset accounts are generally only available on variable rate loans or the variable portion of a split loan. They're also more common on investment loans than owner-occupied holiday home loans, although some lenders offer them across both categories.

Managing Loan to Value Ratio and Lenders Mortgage Insurance

Your loan to value ratio (LVR) determines whether you'll need to pay LMI and influences the interest rate you'll be offered. Most lenders will lend up to 90% or 95% of a property's value for an owner-occupied home, but holiday homes and investment properties are typically capped at 90% LVR, and some lenders limit it further to 80%.

If you're borrowing above 80% LVR, you'll likely be required to pay LMI, which protects the lender if you default. For a holiday home, LMI can add several thousand dollars to your upfront costs, depending on the loan amount and LVR. Some buyers choose to capitalise the LMI cost into the loan rather than paying it upfront, but this increases your total borrowing and interest costs over time.

Using equity from your Oakleigh South home to contribute a larger deposit can help you stay under the 80% LVR threshold and avoid LMI altogether. This approach also gives you access to better interest rate discounts and more flexible loan features.

Portable Loans and Future Flexibility

A portable loan allows you to transfer your existing loan to a new property without breaking your fixed rate or losing your current interest rate. This feature is particularly relevant for holiday home buyers who may later decide to sell their primary residence and move into the holiday property permanently.

Not all lenders offer portability, and those that do often have specific conditions. You'll generally need to stay with the same lender, maintain the same loan type, and meet their current lending criteria. Portability can save you significant break costs if you're exiting a fixed rate early, but it's not automatic. You'll need to apply and have your finances reassessed.

If you're purchasing a holiday home in your 50s or early 60s and think you might retire to that location within a decade, portability is worth discussing during your initial home loan pre-approval process.

Rental Income and Borrowing Capacity

If your holiday home will generate rental income, most lenders will include a portion of that income when calculating your borrowing capacity. The amount they accept varies, but it's typically around 70% to 80% of the projected rental income, which accounts for vacancy periods, maintenance, and management costs.

For short-term rental properties in popular holiday areas, lenders may scrutinise the income more closely or ask for evidence of bookings, occupancy rates, or a rental appraisal. If you're buying in an area with strong holiday rental demand, such as the Surf Coast or Gippsland Lakes, providing evidence of comparable rental returns can strengthen your application.

Rental income can make the difference between being approved for a holiday home loan or falling short on serviceability, particularly if you're already carrying a mortgage on your Oakleigh South property. Even modest rental income can improve your position, especially when combined with equity release to reduce your deposit shortfall.

Structuring for Tax Efficiency

If your holiday home is classified as an investment property, the way you structure your loans can influence your tax position. Interest on investment loans is tax-deductible, but interest on owner-occupied loans is not. If you're using equity from your Oakleigh South home to fund the holiday property purchase, it's important that the equity loan or split is clearly identifiable as being used for investment purposes.

Some buyers make the mistake of redrawing funds from their primary residence mortgage to purchase an investment property, which can blur the lines and reduce the amount of interest they can claim. Setting up a separate split or standalone loan tied specifically to the investment property keeps the interest deduction clear and maximises your tax benefit.

If you plan to eventually move into the holiday home as your primary residence, consult your accountant before making the switch. Converting an investment property to owner-occupied can trigger capital gains tax implications, and the timing of that change can affect your overall tax position.

Choosing the Right Lender and Loan Product

Not all lenders treat holiday homes the same way. Some cap lending at 80% LVR for any property that isn't your primary residence. Others are more flexible with holiday homes that are clearly for personal use rather than generating rental income. A handful of lenders also have restrictions on lending for properties in certain postcodes, particularly remote or high-risk bushfire areas.

Working with a mortgage broker gives you access to home loan options from banks and lenders across Australia and lets you compare rates and features without applying to each one individually. Some lenders offer better interest rate discounts for customers with multiple loans or high equity positions, while others have more competitive fixed interest rate home loan products or flexible offset account features.

Your choice of loan product should reflect how you plan to use the property, whether you'll rent it out, and how long you expect to hold both mortgages. If you're an Oakleigh South resident with strong equity and stable income, you may have access to home loan packages that bundle your primary residence and holiday home under one discounted rate structure.

Call one of our team or book an appointment at a time that works for you to discuss your holiday home loan options and find a structure that fits your goals and financial position.

Frequently Asked Questions