Common Mistakes When Buying a Holiday Home

Treating Your Holiday Home Like Your Primary Residence

Lenders assess holiday home loans differently from owner-occupied properties. The loan is typically classified as an investment property, which means higher interest rates and stricter lending criteria, even if you plan to use it exclusively for family getaways rather than rental income.

Consider a member posted to Edinburgh Defence Precinct who wants to buy a coastal property near Victor Harbor. The property will be used solely for weekend trips and leave periods, not rented out. Despite no rental income being involved, most lenders will apply investment loan rates because the property is not the member's primary residence. That rate difference can sit between 0.20% and 0.50% higher than an owner-occupied variable rate. On a loan amount of $400,000, that translates to an additional $1,000 to $2,000 per year in interest costs.

Some lenders offer a middle category called "second home" or "holiday home" loans with rates closer to owner-occupied products, but these require the property to remain non-income-producing. The moment you rent it out, even for a few weeks during summer, the loan must be reclassified as an investment loan. Knowing this upfront allows you to structure the home loan application correctly from the start.

Underestimating the Deposit Requirement

You cannot use a 5% deposit scheme for a holiday home. Government-backed low deposit schemes, including the Defence Home Ownership Assistance Scheme (DHOAS), only apply to your primary residence. That means you need a genuine deposit of at least 20% to avoid Lenders Mortgage Insurance, or between 10% and 20% if you are willing to pay LMI.

For ADF members, there is one exception. Some lenders offering no LMI loans for ADF members extend that benefit to investment and holiday properties, allowing you to borrow up to 90% of the property value without LMI. This can reduce the upfront deposit by tens of thousands of dollars, but not all lenders include holiday homes in their no LMI policy. You need to confirm eligibility before committing to a property.

Ignoring Ongoing Costs Beyond the Loan Repayment

A holiday home loan repayment is only one part of the financial commitment. Lenders will assess your borrowing capacity based on your ability to service both your existing home loan and the new holiday home loan simultaneously, plus all associated property costs.

In our experience working with members across South Australia, those buying in the Adelaide Hills or along the Fleurieu Peninsula often underestimate council rates, insurance, and maintenance for a second property. A property in a bushfire-prone area near Stirling or Mount Barker can carry insurance premiums two to three times higher than a suburban Adelaide home. Add in quarterly water and council rates, annual maintenance, and the occasional storm damage repair, and the total annual cost can exceed $8,000 to $10,000 before the loan repayment is considered.

Lenders apply this same logic during serviceability assessments. They include the estimated holding costs of the holiday property, even if you do not plan to rent it out. If these costs push your debt-to-income ratio too high, your loan amount will be reduced or the application declined.

Choosing the Wrong Loan Structure

A fixed interest rate home loan might seem appealing for a holiday property, particularly if you want predictable repayments. But holiday homes are often purchased with future plans in mind, such as eventual retirement or relocation. Locking into a fixed rate for three to five years can create problems if your circumstances change.

A portable loan structure is worth considering if there is any chance you might sell your current primary residence and move into the holiday home later. Some lenders allow you to transfer the loan from one property to another without reapplying or paying discharge fees. Others do not, and you could face break costs on a fixed loan if you need to exit early.

A split loan, where part of the loan is fixed and part remains on a variable rate, offers some flexibility. You can make extra repayments on the variable portion to build equity while keeping part of the loan locked at a known rate. This approach works well when your posting schedule is uncertain and you may need to adjust your property strategy within a few years.

Failing to Factor in Rental Income Properly

If you plan to rent the holiday home occasionally to offset costs, lenders will only accept a portion of that income when calculating your borrowing capacity. Most lenders apply a rental income factor of 70% to 80%, meaning they assume 20% to 30% of the gross rental income will go toward vacancies, maintenance, and management fees.

As an example, a property near Glenelg that could generate $400 per week during the summer might only contribute $280 to $320 per week to your assessed income. That shortfall impacts the loan amount you can borrow. If the property remains vacant for part of the year, the actual income will be lower still, so it is worth running realistic rental projections rather than relying on peak season rates.

Some lenders will not accept any rental income unless you have a signed lease or a property management agreement in place. This can delay home loan pre-approval if you are still deciding whether to rent the property out or keep it for personal use only.

Not Using an Offset Account

An offset account is one of the most underused features on holiday home loans. Because the property is typically classified as an investment loan, any interest charged is usually tax-deductible if the property is rented out or available for rent. But if you are not generating rental income, an offset account helps reduce the interest you pay without affecting the tax treatment of the loan.

You can park your savings or income in a linked offset account, and the balance offsets the loan principal when interest is calculated. On a $400,000 loan with a $50,000 offset balance, you only pay interest on $350,000. That alone can save several thousand dollars per year, depending on the variable interest rate.

Some lenders charge higher fees for offset accounts on investment products, so it is worth comparing home loan features across different lenders to find a package that includes an offset without inflated monthly account fees.

Overlooking the Impact on Future Borrowing Capacity

Taking on a second property loan reduces your ability to borrow for future purposes. Lenders assess your total debt position when you apply for any new credit, including car loans, personal loans, or further property purchases. A holiday home loan will appear on your credit file and reduce your borrowing capacity for other financial goals.

This is particularly relevant for ADF members who may want to expand their property portfolio or relocate to a different state due to posting changes. If the holiday home loan is too large relative to your income, it may prevent you from accessing finance for another property or refinancing your existing home loan at a lower rate.

One way to manage this is to keep the holiday home loan amount moderate and retain some equity in your primary residence. That equity can be accessed later through equity release loans if needed, without triggering a new full loan application.

Assuming All Lenders Treat ADF Members the Same

Not all lenders extend their ADF-specific benefits to holiday home loans. While some lenders waive LMI for ADF members on owner-occupied and investment properties, others restrict that waiver to primary residences only. Interest rate discounts and fee waivers may also differ depending on whether the loan is for your main home or a second property.

We regularly see members assume that because they received a rate discount on their primary residence, the same discount will apply to a holiday home loan. That is not always the case. Some lenders apply different pricing structures to investment and holiday properties, and the rate discount may be smaller or removed entirely.

Before applying, confirm which home loan products are available to ADF members for second properties and whether the same benefits apply. This can make a significant difference to the total interest paid over the life of the loan.

Buying a holiday home is a solid financial move if the loan structure suits your circumstances and the property fits your long-term plans. The difference between a smooth purchase and a declined application often comes down to understanding how lenders assess second properties and preparing accordingly. Call one of our team or book an appointment at a time that works for you.

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