For a homeowner to buy a vacation home or investment property, that’s a pretty big milestone. Understanding how to go about purchasing a second home will help ensure the investment pays off for you.

Where to Begin

Like with your initial home purchase, to purchase a second property, you will likely follow the same mortgage application process. To approve your application, your debt ratios, credit history, and income will be analyzed by your lenders. As before, you should also shop around. Working with a broker will help you narrow down your search to the best lenders and rates available to you.

However, there can be a few differences with a second home mortgage.

The Down Payment

The minimum downpayment required fluctuates based on the purchase price of the home. If it’s under $500,000, you probably can put down only 5%. Anything over a million dollars will require at least 20%, sometimes more. If you can put down a larger down payment, you will save money long-term on financing charges. The smaller your down payment, the more mortgage contribution you will require, thus raising interest costs over time. And, if your downpayment is under 20%, you are legally required to get mortgage default insurance and pay all necessary fees on top of that.

Vacation Home or Investment Property?

Usually, purchasing a second home can be for one of two reasons. Will the second home be another residence for yourself and your family? Or, are you looking to make it an investment property, to be rented out to prospective renters? You can also only rent out a portion of the second home but still occupy the remaining portions. 

If you are looking at an investment property that will have 4 or 5 individual units, you may need a commercial investment property mortgage instead. This mortgage has considerable differences from a typical home mortgage. Working with a licensed mortgage broker can help you determine what loan product is best for your situation.

Second Home Tax

If your second home will be a rental property, you can write off many expenses incurred such as property taxes, utilities (if you are covering it), renovations, cleaning, advertising, and insurance. Working with an accountant can help make sure you don’t miss anything important.

Of course, you will have to pay property tax on both your primary residence and secondary residence as well.

Why Invest in a Second Home

Investing in a second home can bring you a few pros to consider:

Rental Income: You can rent out the property and generate monthly income to help pay off the mortgage or earn profit. Rental income can also supplement your income on mortgage applications opening up better terms and rates for you.

Asset Appreciation: While property prices are coming down in Canada, there is still a housing shortage which will keep the dip in prices temporary. Your home is still very much expected to appreciate in value over time so you could generate profit upon its sale.

Write-Offs: As stated, rental property management expenses can be written off on your tax return.

As with every investment, they come with cons you will want to be aware of. Here are the main points to consider:

Cost: Does your financial situation support carrying on a second home and mortgage? You will want to make sure you can support yourself and your family still. Ensure purchasing a second home will not lead to unwanted financial struggles.

Tenants: Renting out a property comes with the risk of running into issues with tenants. This can lead to property damage or missed payments that make the chore a headache for you. You also risk long-term vacancy issues as sometimes you may not be able to find a tenant.

Opportunity Cost: While real estate is a great investment opportunity, it’s not the only one. If you are looking for great returns in a shorter period of time, the stock market may be a better option for you. Purchasing a property locks up your investment in the home until you sell and it may not be right to sell for a number of years.

More Tax: You may have to pay increased income tax on rental income as well as capital gains tax if you sell. An accountant can help you understand the tax responsibilities of owning a rental property.

Now, a second property investment can definitely benefit you. If it becomes a secondary residence, you will gain from the sale of your home whatever appreciation value the property gets. Inflation and housing market issues can affect any profit this way, so it may not be the best option for you.

Purchasing a rental property will net you profit quicker and long term. You can also still live in the home and only rent out a portion of it (such as the basement) or only lease it off-season (when you don’t use it).

Your financial situation is the biggest challenge you will face when deciding if purchasing a second home is right for you. It can net you additional income or give you a fun vacation home for your family. There are many ways a second home can generate revenue for you. 

If you are ready to apply for a second home mortgage, the Mills Team is ready to answer all your questions and help you find the financing you need.