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 and more middle-class Canadians are purchasing a second property. Younger Canadians are also thinking about buying a second property; 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 thinking of investing in or fixing up and flipping, you need to be aware of 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?
Lots of people want a buy a second property, but you need to ask yourself if you can afford it and if so, how you can get the best financial products at the best rates. While interest rates in Canada are on the rise, they still remain near record lows, which means it’s the perfect time to look at buying a second property.
What Are Your Financing Options?
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 all of Ontario means your home has also increased in value; this too has helped build up additional equity.
You can tap that equity by refinancing your home. Refinancing is when you replace the original mortgage with a new mortgage. 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 mortgage.
Again, depending on how much equity you’ve built up, you could use that money for a down payment on the second home, renovations, or maybe even purchase it outright.
Like any mortgage, when refinancing, you can choose a variable or fixed mortgage and 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. But 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 up front, 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.
Will You Get Approved for a Mortgage on a Second Property?
When buying a second property, you still need to go through an approval process. Just because you already own a home does not mean that the big banks will automatically approve you for a new mortgage for a second property, though.
The approval process to buying a second home is very similar to buying a primary residence. Traditional lenders will look at your employment history, financial information, credit history, and details about the second property.
If you’re self-employed or work on commission, it might be difficult to get a mortgage to buy a second property because your income stream might be unreliable.
Because of stricter lending rules, homebuyers also need to pass a stress test, which ensures they can afford the mortgage if interest rates rise. For a five-year fixed mortgage, homebuyers need to qualify for whichever rate is higher: The Bank of Canada’s posted rate or the rate on the mortgage plus 200 basis points.
Stricter lending rules like the stress test are taking the wind out of Canada’s housing market. In 2018 alone, it is estimated that the stress test prevented 40,000 home purchases.
Like the primary mortgage, you need to have a down payment of 5%, 10%, or 20%. As with a first mortgage, the most popular down payment used for buying a second home is 20%.
Canadalend.com, Helping Your Secure a Better Mortgage for Your Second Property
If you’re thinking of buying a second property contact the licensed mortgage experts at Canadalend.com.
In addition to being licensed, the mortgage professionals at Canadalend.com are also independent. That means they work to help you find the best mortgage at the best rates. In fact, Canadalend.com has access to hundreds of different lenders, many who 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.