Points to Consider When Financing a Second Home

A second home or vacation retreat can be a wonderful idea as well as a smart financial decision. But the mortgage qualification guidelines can be more stringent than those for a primary residence. Here's what to know, some points to consider and things to think about before you begin the search for another property:

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

Financial Basics

Many good reasons exist for buying a second home in addition to the desire for a vacation getaway. It may be that a condo in another city could be used for business as well as pleasure, or a second home might be the perfect answer to housing for a college student or comfortable full-or-part-time residence for aging parents.

Whatever the reason, however, the prime considerations are financial, now and for the future. While real estate typically is a sound investment because it appreciates in value over time, current drain on resources can be steep. There is not only the monthly payment to consider, but taxes, insurance and upkeep can be substantial.

In addition, the required down payment may be as high as 20 to 25 percent. As little as three years ago, loans for second homes were available with only five percent down. Under favourable terms offered by insured Canadian Second Home Mortgage Program, second-home purchases spiked. Today, interest in second homes is still relatively strong, and for some of the same reasons. But financing options differ greatly.

Available Options

Mortgage interest rates remain relatively low, and the second home market is still strong. Urban prices have moderated somewhat, and real estate sales are high. The three requirements under the insured mortgage program still make good sense for today, and for the future:

1. The home must be in Canada
2. It must be accessible and able to be occupied on a year-round basis
3. Occupancy by the borrower is required for at least a part of the year, or a family member may occupy the home rent-free

Buying a second home for use by a college student or aging parents makes good practical sense. Real estate appreciates, and future value often represents substantial ROI when compared with other types of investment.

Occupied and Cared For

The need for a property manager or caretaker is eliminated when the home is occupied on a full-time basis, and there is no need for specialized accounting or bookkeeping necessary to track investment property. A lender will use similar criteria to evaluate second mortgage risk as for a first home loan. With adequate cash flow and financial strength, qualified buyers should face no unique hurdles. Tax consequences should be discussed with a professional.

Borrowers are urged to consult with mortgage lenders, but there are some programs that would allow a buyer to leverage first home equity to purchase the second home. Having the second home occupied might also make getting insurance on the property easier, according to some reports.

Future Benefits

At some future time, as residence needs change, the second home becomes fully available as a vacation home or part-time retreat. The expectation is that it could then be sold for more than the original purchase price, or could become a principal residence upon sale of the first home.

A secondary residence in St. Albert might also be be converted to rental property and treated as an investment, but buyers should seek legal review and determine tax consequences in advance. No matter what the decision may be, second home buyers should seek current information from real estate professionals as well as mortgage lenders and trusted advisers. Take time to find out the facts and consider all options before making a buying decision.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.