Avoid These 5 Mistakes When Buying a Holiday Home

A holiday home loan isn't assessed the same way as your primary residence.

Lenders treat a second property purchase differently because you're carrying two mortgages, which changes how they calculate your borrowing capacity and the deposit requirements they'll impose. Most small business owners underestimate how their business income structure affects approval, particularly when profit margins fluctuate or when you're maximising deductions at tax time.

Underestimating the Deposit You'll Actually Need

Most lenders require a minimum 10% deposit for a holiday home, but that's before you factor in Lenders Mortgage Insurance and settlement costs. If you're borrowing above 80% of the property value, LMI gets added to properties that aren't owner-occupied, and the premiums are typically higher than for a primary residence.

Consider a buyer purchasing a coastal property who assumes a 10% deposit will be sufficient. They've accounted for the property price but not the additional costs that come with a higher loan to value ratio. Once LMI, legal fees, and stamp duty are included, the upfront cash required can increase by 30% to 40%. For small business owners, pulling that extra capital out of the business at short notice can disrupt operations or delay planned equipment purchases.

Rather than assuming a percentage, work backwards from the total cash you can access without affecting your business, then determine what purchase price that supports. A borrowing capacity assessment that includes your current mortgage and business income structure gives you a realistic figure before you start looking at properties.

Claiming Maximum Tax Deductions Before You Apply

Small business owners often reduce taxable income as much as possible, which makes sense for minimising tax. It works against you when a lender reviews your last two years of financials to assess loan serviceability.

Lenders calculate your income based on tax returns and financial statements. If you've written off significant expenses or structured your income to minimise tax, the income figure they use for assessment will be lower than what you're actually generating. That reduction directly impacts how much you can borrow, and in some cases, it can mean the difference between approval and decline.

In our experience, buyers who plan to apply for a holiday home loan within the next 12 to 18 months benefit from adjusting their tax strategy during that period. Speak with your accountant about the trade-off between tax savings now and borrowing capacity later. Some lenders will allow add-backs for certain deductions, but not all, and the rules vary depending on your business structure and the lender's policy.

Assuming Your Holiday Home Can Be Rented Out to Improve Serviceability

Some buyers expect that rental income from the holiday property will offset the loan repayments and improve their serviceability. Lenders don't give full credit for that income, especially if the property is in a holiday area with seasonal occupancy.

Most lenders will only accept 70% to 80% of projected rental income when calculating serviceability, and they'll require evidence that the property can generate consistent bookings. If you're purchasing in a location with limited rental demand outside peak seasons, the income might not be factored in at all. You'll still need to demonstrate that you can service both your existing home loan and the new loan from your personal and business income alone.

If rental income is part of your strategy, prepare a rental appraisal from a local property manager and understand how your chosen lender assesses that income before you commit to a purchase price. Some lenders are more flexible with holiday rental income than others, and the difference in policy can affect your loan amount by tens of thousands of dollars.

Overlooking How a Split Rate Structure Protects You

A split loan lets you fix a portion of your holiday home loan while keeping the rest on a variable rate. This structure is particularly useful for small business owners who want repayment certainty but also need the flexibility to make extra repayments or access an offset account.

If you fix the entire loan, you'll typically lose access to an offset account and face restrictions on extra repayments. If you keep the entire loan variable, you're exposed to rate movements that could increase your repayments when cash flow is already tight. Splitting the loan gives you both.

For example, a buyer financing a holiday property might fix 50% of the loan at a set rate to lock in repayments on half the debt, then link a variable rate offset account to the other half. Any surplus business income can sit in the offset to reduce interest on the variable portion, while the fixed portion remains predictable. That approach reduces interest costs without locking you into a structure that limits flexibility.

If you're not sure whether a fixed rate, variable rate, or split rate suits your situation, compare how each option affects your repayments and access to features like offset accounts. The difference in total interest paid over five years can be substantial, particularly if your business generates uneven income throughout the year.

Not Structuring the Loan to Suit Future Plans

Some buyers structure their holiday home loan based on what works now, without considering how they plan to use the property in three to five years. If there's a chance you'll convert the holiday home into an investment property or sell your primary residence and move into the holiday home, the way you structure the loan now affects your tax position and flexibility later.

If you eventually rent the holiday home out, only the interest on the portion of the loan used to purchase the property is tax-deductible. If you've been making extra repayments or redrawing funds for other purposes, you can lose that deductibility. If you plan to move into the holiday home as your primary residence, you'll want a loan structure that allows you to port the loan or refinance without significant break costs.

A portable loan feature lets you transfer the loan to a different property without reapplying or paying discharge fees. Not all lenders offer portability, and not all loan products within the same lender include it. If you're purchasing a holiday home as a potential future residence, confirm whether the loan can move with you and under what conditions.

Before you settle on a loan structure, talk through your plans for the property over the next five years. A loan that suits your current situation might not suit where you're headed, and changing it later can be expensive.

Financing a holiday home when you're self-employed and managing a business requires more than comparing interest rates. The way your income is assessed, the deposit you'll need, and the loan features you choose all affect whether the purchase supports your goals or creates unnecessary pressure on your cash flow. Call one of our team or book an appointment at a time that works for you.

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