Buying a Vacation Property
Buying a Vacation Property This is essentially the same mortgage and financing process as purchasing a home. To buy a vacation property, you are required to put a minimum down payment of 5% of the purchase price, as well as purchasing appropriate insurance and accounting for those premiums in the same way as a regular home purchase. Financing Your Vacation 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. There are two common ways to do this: 1. Refinancing This option refers to getting a reevaluation on your home and 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. Remember - when using 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. 2. HELOC or “Home Equity Line of Credit” This option allows you to borrow money using the equity in your property, with the property as collateral. In Canada, you are able to borrow up to 65% of your home’s value using this method. Since a HELOC serves as a revolving line of credit to access funds, you can use as much (or as little) as needed. This also ensures you will only pay interest on the amount you actually use. You can utilize a HELOC option by tying it into your existing mortgage or by applying for it separate from your mortgage. However, keep in mind, your HELOC balance AND current outstanding mortgage cannot exceed 80% of your home’s value when added together.
NOTE: If you are considering buying a unit within a hotel as a vacation spot (known as "fractional ownership"), it can be difficult to get financing.
Managing Intention to Rent
Buying a property for the purpose of renting it out comes with different qualifying criteria and mortgage product options than traditional vacation home purchases. It is important to determine before purchase what the purpose of your vacation home will be to ensure you have the correct information and can accurately determine your costs. When purchasing a vacation property for rental, consider the following:
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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.
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Only a portion of the rental income can be used for qualifying and determining 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 large impact on what you qualify for.
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Interest rates typically have an additional premium when the mortgage is for a rental property versus for a home someone intends on living in. This premium can be anywhere from 0.10% to 0.20% on a regular 5-year fixed rate.
Other Considerations
Purchasing a vacation property is a great opportunity, both for your investment portfolio and life! Before taking on a secondary property, you will need to have your down payment in order. Keep in mind, if there is no rental component, the minimum is 5% but if you are looking to rent it out then the down payment required is 20% of the purchase price. In addition to the down payment, you will also need to pass the stress-test and prove that you can financially carry both mortgages.
If you are looking to purchase a vacation home, please get in touch with me today so we can review your current situation and your goals to help you achieve your vacation property dreams!
