What you need to know about taking out a mortgage for a vacation home

Ideally, when you buy a holiday home, you’ll want to be able to not only enjoy it yourself but also be able to earn some money from it. Until a few years ago, your holiday home could have sat vacant for most of the year while you weren’t using it if you struggled to find holiday renters. These days, however, with websites like Airbnb, Stayz and HomeAway, it’s now easier than ever for you to find holiday renters for your holiday home.

If you’re currently looking to purchase a vacation property you’ve probably been researching holiday home loans. When doing your research, you’ll need to consider if you want to have the flexibility of living there whenever you desire or you want to earn rent. Most lenders will consider your application differently based on whether you’re using the property for personal use, or renting it out.

How much can I borrow for a holiday home loan?

Vacation home loan options vary, however, lenders may lend up to 95 per cent of the property value. You may also be able to get a loan of up to 100 per cent of the property value if you use the home equity of your existing property or have a guarantor.

If you plan to use the property for investment purposes, a few lenders may require a rental income letter showing the proposed rental income for the next year. Generally, lenders consider up to 80 per cent of the rental income to determine the vacation home loan amount.

Qualifying for a home loan for a holiday house

If you’re buying the holiday home for personal-use, lenders don’t have stringent vacation home loan requirements. There is still, however, some risk for the lenders if you default on your repayments. They may see selling your vacation home during the off-season as more difficult.

If you plan to purchase the property primarily as an investment, your application for a vacation home mortgage loan may not be considered as strong because the rental income during the off-season may be uncertain. Lenders will then be concerned that you may not be able to cover the mortgage repayment.

The holiday home mortgage is also impacted due to the costs that come with property maintenance and rates. AlsoBesides, insurers don’t usually provide home insurance if your property is vacant for more than 60 days in a year.

Buying a holiday house for self-use

Holiday homes offer a range of benefits that include lifestyle value along with rental income and tax benefits. If you buy it for personal use, you have the freedom to visit whenever you want and live there as long as you wish to.

However, it won’t provide you with rental income, which means the burden of the mortgage repayments is entirely on you. This could put extra stress on your finances if you already have a mortgage on your primary residence.

Insurers also don't provide home insurance if your property is vacant for more than 60 days out of a year because the risk of break-ins is higher. Also, it’ll take longer for emergency repairs like a burst water pipe to happen when the property remains vacant for long periods.

Buying a holiday house for rental income

If you rent your vacation home to a permanent tenant, the rental income may cover the mortgage repayments. However, you will not be able to use the house as a vacation home whenever you like. Generally, the rental income you’ll earn from long term tenants is lower than the possible rent you could get from holidaymakers.

If you rent your holiday home during the peak season you can earn higher rentals, especially if it’s located in a popular destination. Vacancies during the holiday season are lower, which means you may be able to charge higher rent.

The flip side is that property management costs may increase due to having many different temporary occupants use your property. And you’ll also have to consider when you’ll use the property for your own holidays versus getting the increased income from holidaymakers.

Is a holiday home loan right for me?

A vacation home may not be the best investment for capital appreciation as several holiday destinations don’t have strong real estate markets. These holiday destinations rely heavily on tourism dollars for their economy resulting in fluctuations and therefore may have very slow growth.

Before you make a final decision, you should consider the loan repayment, maintenance expenses, the potential rental earnings, and the fun of enjoying your own holiday home. Ensure the benefits are in line with your investment goals.

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