Purchasing a Cottage / 2nd Home
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 looking for a summer cottage, lenders have some restrictions on the property type to determine the required down payment. If the property meets Type A Criteria then you can put as little as 5% down, however if the property is a Type B property, then 10% down is required. If you are looking to avoid Mortgage Default Insurance, the down payment required ranges from 20 to 50% down depending on the property criteria. We can help you determine the options.
Vacation Homes (Type A)
· Foundation must be permanent and installed beyond the frost line. This includes concrete/concrete block or preserved wood foundations certified by a professional engineer or post/pier foundations on solid bedrock.
· Must be zoned and used as residential, rural or seasonal. Lenders do not accept mixed uses or rental pooling.
· Freehold or condominium title. Lenders do not accept co-ops or ¼ interest ownership.
· At minimum, property must have a kitchen, 3-piece bathroom, bedroom, and common area.
· Remaining economic life must be 25 years.
· Year-round road access on reasonable quality public roads, serviced by the local municipality. Lenders also allow privately serviced roads, provided there is a maintenance contract in place.
· Property must be winterized with a permanent heat source. For example, heating can be baseboard, forced air, water radiator, radiant, coal, propane, geothermal heat pumps, or heat pumps.
· Good quality construction with no signs of deferred maintenance.
· Water source: well, municipal serviced, and cistern. Water source must be drinkable. Lenders accept lake or river water, provided the property has its own filtration system. For example, a reverse osmosis system.
· There must be good market appeal in the area with no adverse influences or neighbourhood nuisances.
Vacation Homes (Type B)
All Type A property requirements apply to Type B, except for the following:
· No permanent heat source is required. For example, a wood stove, fireplace, stove or heat blower is acceptable.
· Foundation may be floating. For example, sitting on blocks.
· Seasonal road use is acceptable. This means the road does not have to be plowed during the winter.
· Water source needn't be drinkable. However, there must be running water in the home.
· Boat access only accepted.
Purchasing a 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.
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 revaluation 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.
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.