Holiday Home Loan

Is it an investment or an owner-occupied?

Sick of renting a house or an apartment in a secret getaway location that you head to a few times a year?

With a holiday home loan, you can buy your own weekend getaway and go there whenever you like!

Some banks are more conservative than others and it mostly depends on whether you plan to use the property yourself and keep it vacant for the rest of the year or use it as an investment property for short term holiday home letting.

How much can I borrow?

Holiday homes are assessed very differently from lender to lender but generally speaking:

• As an owner-occupied property or an investment: Borrow up to 95% of the property value or up to 100% using equity in your own home or a guarantor.
• If you’re investing, some lenders will want to see a rental income letter detailing proposed rent for the property for the next 12 months.
• Most lenders will accept up to 80% of proposed rental income, and the annual rent shouldn’t exceed 6% of the property’s market value.
• There are borrowing restrictions around serviced apartments.

How do I qualify?

If you’re buying the holiday home purely as an owner-occupied property, lenders don’t really have a problem as long as it’s not located in a restricted rural or regional town or postcode.

In saying that, during the off season, holiday homes can be really difficult to sell, which is high risk to the bank if they ever need to sell the property in the event that you default on your mortgage.

When buying a holiday house as an investment property, the trick to getting approved is lender choice.

Most lenders don’t like short-term holiday letting and this is the reason they want to see a 12 month rental income letter signed by the local real estate agent or property manager.

While it’s difficult to sell during off-peak, vacancy rates are also much higher meaning the owner simply isn’t receiving any income from the property so it’s not covering your mortgage repayments.

If you’re relying on proposed rental income (rental reliant) to qualify for a home loan then this can have a serious impact on your borrowing power.

Coupled with the other costs of owning a holiday home such as rates and maintenance, you may find your holiday home loan application declined. That’s not to mention the fact that most insurers don’t do home insurance for properties that are vacant for more than 60 days in the year.

The pros and cons of a holiday home

At their best, holiday homes combine lifestyle with a good little rental income earner and tax benefits.

However, it all depends on what you want out the property.

Buying to live

Pros

• You can head to the holiday home whenever you like and spend as much time as you want there.

Cons

• You’ll have to cover the holiday home loan repayments yourself and you won’t be able to claim negative gearing benefits.
• Holiday homes have a higher risk of break and enter when they’re vacant, which is the reason why insurers won’t cover a home that has been vacant for more than 60 days.
• Essential and even emergency repairs can go unattended for months such as a burst water pipe.

Rent out to a permanent tenant

Pros

• Your mortgage will be covered when you’re not living in the property.

Cons

• Like owning a timeshare, you can’t simply live in the holiday home whenever you like and, from an investment perspective, rental yields tend to be lower.

Rent out during peak periods

Pros

• This investment strategy tends to attract higher yields than simply leasing to a permanent tenant. Vacancy rates are much lower during the holidays so you can set rent much higher.

Cons

• Simply speaking, you won’t be able to enjoy the property when you really want it.
• In addition to this, real estate agent or property manager fees can be high due to the high turnover of tenants.

What if I’m going for a capital growth strategy?

Holiday homes aren’t the best investment if you’re looking to turn it over in the next 5-10 years for something bigger and better.

Towns and locations known as retreat destinations don’t necessarily have strong property markets.

Many coastal communities, for example, have two-speed or even one-speed economies that rely mainly on the tourism.

Because their property market fluctuates, it isn’t unheard of to find towns that have had slow or even negative capital growth for years.

Unless you can find a location with good fundamentals, you may end up investing in a holiday home that will return far less than you expected.

What should I consider with location?

Buying a holiday home is unique in property investing, in that you not only have to take into account vacancy rates and yield estimates but you also have to think logically about what you would want out of a holiday home.

You may find a property that’s close to strong infrastructure but it doesn’t necessarily make it a holiday retreat that will attract short-stay tenants.

Consider this: if you leave on a Friday afternoon after work, are you going to be spending most of your time travelling to get to the holiday home? That doesn’t sound very exciting!

As a general rule, you’ll want to consider locations that are within a two hour drive of a major city centre.

Good access to local shops and cafes is plus but also consider whether there is a local attraction such as a beach, a lake or vineyard.

Although holiday homes aren’t known for generating massive capital growth, you should use caution when considering towns that rely heavily on tourism.

Again, any sudden change to the economy can send the local property market reeling and vacancy rates shooting through the roof.

How can owning a holiday home affect my tax?

If it’s fully-rented, holiday homes generally attract similar negative gearing tax benefits to other types of investment properties.

Do you intend to use the house at some points during the year? You’ll still be able to offset some of your expenses against assessable income but not all. It’s based on how much of the financial year that it was rented out.

According to the Australian Taxation Office (ATO), negative gearing benefits are available for holiday homes that are so-called “genuinely available for rent”.

In situations where you grant exclusivity to friends or family or you place strict conditions on tenants, this would be considered “not genuinely available for rent”.

For example, if you charge your friends less than market rent or you don’t charge them at all, you won’t be able to claim tax deductions such as depreciation, rates, and repairs and maintenance costs.

It’s important to get financial advice whenever using a holiday home as part of your investment strategy. Check out the holiday homes page on the ATO website for more information.

Do you need a holiday home loan?

Whether you’re looking for a unique way to generate a second source of income or you simply want to own your own little slice of heaven, call us on 1300 889 743 or complete our free assessment form to speak with one of our holiday home loan specialists.

We can let you know if you qualify and how much you can borrow.