Second Property.

In the case of purchasing a secondary property, most lenders will allow you to borrow money against the equity you have in your current home and use it as a down payment for a second home. Before jumping in, it is important to understand the different financing options to determine which route best suits your circumstances and property goals.

Refinancing

One option for tapping into your home equity for the purpose of purchasing a secondary property, is to refinance your mortgage. Essentially, mortgage refinancing means getting a reevaluation on your home and then redoing your mortgage based on the current value. This will allow you to tap into the equity your home has built over the years, and pull out the extra funds for a down payment on your secondary property.  Keep in mind, when using some of your current equity, it will increase the principal amount and the interest payments on your mortgage as the mortgage is now refinanced at a higher amount.

HELOC

There is a second option to unlock your home equity, which is through a line of credit or a HELOC, which stands for “Home Equity Line of Credit”. This option allows you to borrow money using the equity in your property, with the property as collateral. 

A HELOC serves as a revolving line of credit to allow the borrower to access funds, as needed, letting you utilize as much (or as little) equity as required. HELOC payments are unique as they are interest only payments versus regular mortgages, which have both Principal Interest and Tax added on. Another benefit to utilizing a HELOC is that you will only pay interest on the amount you actually use! This can provide financial breathing room, especially during tight months. That said, if you do choose to pay the interest as well as a portion towards the principle, it can help you pay off the loan much faster. 

You can utilize a HELOC by tying it to your existing mortgage or applying for it separately.

In Canada, you are able to borrow up to 65% of your home’s value using this method. However, keep in mind, your HELOC balance AND current outstanding mortgage cannot exceed 80% of your home’s value when added together. 

Buying a vacation property is essentially like purchasing a second home. The minimum down payment remains 5% of the purchase price and will require the same processes as your first mortgage. If you are purchasing a non-winterized vacation home, or will not have year-round access, then you will be required to put down 10%.

It is also important to note that if you plan to use your vacation home to provide rental income as this will have different requirements.

If you are purchasing a secondary property – whether a vacation home or investment property – there are a few differences if the intention is to rent. Before you look at purchasing a rental property, there are a few things to consider:

1. The minimum down payment required is 20% of the purchase price, and the funds must come from your own savings; you cannot use a gift from someone else.
2. Only a portion of the rental income can be used to qualify for and to determine how much of a mortgage you can afford to borrow. Some lenders will only allow you to use 50% of the income added to yours, while other lenders may allow up to 80% of the rental income while subtracting your expenses. This can have a much higher impact on how much you can afford.
3. Interest rates will usually have an added premium on them when the mortgage is for a rental property versus a mortgage for a home someone intends on living in. The premium can be anywhere from 0.10% to 0.20% on a regular 5-year fixed rate.

Rental income from the property can be used to debt service the mortgage application, but do bear in mind that some lenders will have a minimum liquid net worth requirement outside of the property.

Along with the added monthly cash flow, rental properties have an added benefit of being able to write-off interest on ANY money used for the rental, even if it is pulled from your primary home’s equity. Also, if you do eventually want to sell this property, do note that it will be subject to capital gains tax. Your accountant will be able to help you determine potential write-offs and required tax payments if you do decide to sell in the future.

You might be surprised to learn that you don’t need to be one of the uber rich or make six figures to have second properties. You just need to have knowledge, determination and a financial plan!

When it comes to purchasing a secondary property, whether for investment, rental or vacation, it can be a great opportunity! Before taking on a secondary property, you will need to have your down payment in order (whether from savings or home equity) based on the minimum requirements. It is also important to have a sufficient credit score to qualify (680 or higher) for a conventional mortgage. However if your credit score has not reached 680, there are still options. Alternative or B Lenders can be great solutions for individuals with credit challenges, while still helping you purchase your dream home!

In addition to the down payment, you will also need to pass the stress-test to prove that you can financially carry both mortgages. Also to keep in mind, there may be potential barriers with lenders as most will limit the number of mortgages within a portfolio. If this is only property number two or three, you shouldn’t have any concerns. However, as you expand your portfolio, you may run into a limit at five properties (at which point you would be considered a commercial file).

Before you jump into the purchase of a secondary property, consult with a Dominion Lending Centres mortgage professional. They can help review your financial situation, current mortgage and equity, and help you make a plan. The keys to success are right around the corner with a little bit of expert advice!