What Is the Process of Buying a Second Property?

The idea of buying a second property used to be reserved for those who were well-heeled. Not anymore.

Whether it’s used as a vacation property, a rental property, or to prepare for retirement, more middle-class Canadians are purchasing a second property. Younger Canadians are also thinking about buying a second property. In fact, 65% of millennials aged 18 to 34 are interested in purchasing a cottage, cabin, or chalet.

Whether it’s a lakefront cottage, cabin in the woods, condo in downtown Toronto, or a suburban home you’re considering investing in or fixing up and flipping, you need to know what you are getting into. That includes the mortgage approval process, refinancing options, and whether you can use a home equity line of credit (HELOC).

Below are some answers to popular questions when purchasing and financing a second property.

Can you afford a second property?

Many people want to buy a second property, but you need to ask yourself if you can afford it and, if so, how to get the best financial products at the best rates. While interest rates in Canada are on the rise, they remain near record lows, which means it’s the perfect time to look at buying a second property.

The Benefits of Buying a Second Property

Investing in a second property can provide financial security, lifestyle benefits, and long-term value. If you’re buying a second home for personal use or considering an income-generating asset, the advantages below can be substantial:

• Potential for rental income: A well-located property can generate the steady cash flow necessary to cover mortgage payments and expenses. If you’re buying a vacation home, you can also rent it out seasonally to offset costs while enjoying it when needed.
• Property appreciation: Real estate values tend to rise over time, thus allowing homeowners to build equity. If you take out a second mortgage loan, the property’s appreciation can help refinance in the future or sell at a profit.

Whether it’s a vacation or a rental investment, a second home mortgage offers competitive rates that make ownership more affordable and also serve multiple purposes based on your long-term goals.

If you’re wondering, “Can I get a second mortgage?” you would be glad to know that financing a second property is more accessible than many realize. Many homeowners use a second mortgage to fund the purchase, which leverages their existing home’s value.

Things to Consider Before Buying

Buying a second property is a lot like adopting a second pet; you need to make sure that you have the time, money, and space to care for it properly. It’s exciting, but without proper planning, it can quickly become overwhelming. To avoid that, here are the factors you need to consider:

• Financial outlook: First, think about your financial situation. Can you afford another mortgage, taxes, and maintenance costs? If not, you might need a second mortgage loan to help with the purchase. A clear budget plan will always prevent financial strain down the road.
• Property usage: Next, consider how you will use the property. Are you buying a vacation home for personal getaways, or do you plan to rent it out for extra income? The answer will affect your financing options, insurance, and, sometimes, even tax obligations.
• Location: If you’re buying a second home in a city or a quiet countryside retreat, research property values, rental demand, and market trends to make informed decisions.
• Extra responsibilities: Lastly, be ready for more responsibilities. Managing two properties often entails handling repairs, upkeep, and potential tenants if you’re renting out.

With careful planning, buying a second property can be a rewarding investment rather than a financial burden.

What are your financing options?

Financing a second home is possible, but isn’t as simple as getting your first mortgage. Since you will be managing two properties, lenders would want to ensure you can handle the payments.

Keen on how to buy a second home? Some homeowners use a second home loan, while others tap into other options, which we explain below:

Refinancing

Buying a second home means, of course, that you already own a first home. Since purchasing your primary residence, you have built up equity in that property. Every time you make a mortgage payment, you build up equity.

The strong real estate market in the Greater Toronto Area and much of Ontario means that your home has also increased in value; this, too, has helped build up additional equity.

You can tap into that equity by refinancing your home. Refinancing is when you replace the original mortgage with a new one. Most people refinance to take advantage of lower interest rates, or they find a mortgage with better terms. Some refinance their primary mortgage because they want to switch from a variable mortgage to a fixed-rate option.

Again, depending on how much equity you’ve built up, you could use that money for a down payment for a second property, renovations, or maybe even purchase it outright.

Like any mortgage, when refinancing, you can choose a variable or fixed mortgage and then renegotiate the amortization period.

A Second Mortgage

Taking out a second mortgage is a popular way to use the equity you’ve built up in your primary home to purchase a second property. Second mortgages are also known as a home equity loan, not to be confused with a HELOC.

A second mortgage is an additional loan that is secured against the property you already have a mortgage on. With traditional second mortgages, you can borrow up to 85% of the appraised value of your home minus what is left to pay on the first mortgage.

Like the primary mortgage, you make monthly payments on the second mortgage. A second mortgage is a great option for those who can comfortably afford to make two monthly mortgage payments.

Home Equity Line of Credit (HELOC)

Homeowners can use a HELOC to access funds to help them buy a second property. However, homeowners need to have at least 20% equity built up in their property and good credit.

With a second mortgage, you get a lump sum payment upfront, and you need to pay interest on the entire sum. A HELOC is a revolving line of credit that accesses up to 65% of the value of the first property.

On a HELOC, you only pay interest on any money you use. If a homeowner does not have 20% equity built up in their property or they have bad credit, it makes more sense to take out a second mortgage.

Owning and Maintaining a Second Property

Have you ever thought about what it really takes to manage a second home? Beyond the noise, there are ongoing costs and responsibilities.

One of the best property management tips is to budget for regular maintenance, including plumbing, roofing, or seasonal upkeep. Unexpected repairs can be costly, hence why setting aside an emergency fund will help cover these expenses without financial strain.

If you are renting out the property, you will also need to manage tenant concerns, handle repairs, and keep the space in good condition. Hiring a professional property manager is one of the smartest property management tips to save time and ensure smooth operations without your presence.

Beyond maintenance, there are financial aspects to consider. Financing a second home means covering mortgage payments, insurance, and property taxes. Unlike your first home, the downpayment for a second property is usually higher, and lenders may have stricter requirements.

As well, utility bills, security costs, and homeowner’s association fees (if applicable) can add to your overall expenses.

Will you get approved for a mortgage on a second property?

Owning one home doesn’t automatically mean that lenders will approve you for another. Buying a second home requires going through an approval process similar to your first mortgage, and traditional lenders will carefully review your financial situation before granting a loan.

Lenders assess your employment history, income, credit score, and debt levels to determine if you qualify. They also evaluate the second property’s details, including its location, market value, and intended use. If you are trying to rent it out, they may consider potential rental income, but approval isn’t guaranteed.

For those who are self-employed or work on commission, the process can be even tougher. Since irregular income can be seen as a risk, getting approved for a second home loan may require additional documentation or a large down payment.

In Canada, stricter lending rules make the approval process more challenging, as homebuyers must pass a stress test. The concept of this test ensures you can still afford the mortgage if interest rates rise.

To qualify for a five-year fixed mortgage, lenders use the higher of these two rates: the Bank of Canada posted rate, or your mortgage rate plus 2%. These rules have severely impacted home buyers, with the online stress test preventing thousands of purchases in recent years.

If you are wondering how to take out a second mortgage, it’s important to know that down payments vary. While some buyers can qualify for as little as 5% or 10%, most opt for a second mortgage loan with a 20% down payment to avoid additional mortgage insurance costs.

If traditional lenders deny your application, there are alternative options, such as private lenders and mortgage brokers. These experts can offer more flexible solutions needed to simplify how to get a second mortgage, even in situations when your financial outlook isn’t perfect.

Canadalend: Helping You Secure a Better Mortgage for Your Second Property

If you’re thinking about buying a second property, contact the licensed mortgage experts at Canadalend. In addition to being licensed, the mortgage professionals at Canadalend are also independent. That means they work to help you find the best mortgage at the best rates.

Canadalend has access to hundreds of different lenders, many of which specialize in providing mortgages to those who have been turned down by the big banks, have unreliable income, have declared bankruptcy, or have bad credit or no credit.

To find out what kind of mortgage you qualify for, contact Canadalend today at 1-844-586-0710 or apply online, and a Canadalend mortgage specialist will set up an appointment at your earliest convenience.