Buying a second home or a vacation property requires special consideration when trying to access mortgage financing.
First you need to understand the difference between the two types of properties. A second home is purchased for families wanting a home in or outside the city to avoid long commutes for work or as a home for children registered in university. A vacation home is for recreational use, possibly on a lake or near a ski resort. In either case, financial lenders consider the buyers will use it themselves or by a family member.
Buying a second home or vacation property
In the majority of cases buying a second home or a vacation property is treated the same by the lender with a couple of exceptions. If a home has only seasonal access by road it will be considered a vacation property and not a second home.
The risk to the lender is greater for a second home. The property can be in a remote or less marketable area. In addition, if the buyer runs into any financial issues they are more likely to make payments on their primary residence before a second property so the chance of default is higher. In this case the minimum down payment will be 10%, the maximum loan amount, $350,000 and amortization 25 years. The minimum down payment for a second home is 5%, typically the maximum loan amount, $700,000 and amortization 25-35 years depending on the lender and the down payment. Under 20% down payment maximum amortization is 25 years.
If the property purchased is outside of the box such as boat access only or doesn’t fit the lender guidelines to qualify there may be other options. If you have good credit you could consider taking equity from your primary residence to either buy your second home in cash or with a large down payment. If you are considering co-ownerships or fractional ownerships these are more difficult to finance and buyers should expect higher interest charges and fees on these kinds of purchases.
Note: When qualifying for a mortgage on a second home the lender will use all sources of your income and all consumer debts (loans, credit card payments) and monthly obligations for housing such as property taxes, mortgage payments on any properties and strata fees (if applicable). If you have a large auto loan to payout you may want to discuss options with your mortgage broker and consider paying out that debt before making a move to buy a second home.
If you are buying a second home or vacation property and need rental income to qualify for the mortgage then you will be applying based on a rental purchase and not a second home. In this case you will need at least 20% down payment.
Remember — always consult your mortgage broker to review your mortgage plan before making a purchase. We will discuss qualifying for a mortgage, options and costs associated with financing and completion of sale so you can make an informed decision.