Have you dreamed of owning a lakeside vacation home on a nearby island (such as Vancouver Island)?
Perhaps your son or daughter is leaving ‘the nest’ to attend college. Instead of paying rental fees, you might be better off investing in a second property they can live in.
What about a future retirement cottage that you can move to eventually? In the mean time, you can offer it to friends for occasional use!
If your commute to work is long, a second place to lodge in once in a while can be a relief. It can save you long drives and hotel fees.
The above home-buying scenarios may be more achievable than you realize. And, they can be good investments too – not just lifestyle choices. They can be bought using vacation property mortgages or secondary home mortgages in Canada.
A good Vancouver mortgage planner can help you maximize your return on these types of dwellings, by using smart financial strategies. They can also guide you through the policies and limitations that lenders may impose on them. Limitations can be based on the type of property you want to buy. So, it’s important to have a smart mortgage strategy in place.
If you’d like to learn more about your options for mortgaging a secondary home or vacation property in B.C., we encourage you to contact us! We’ll learn about your goals, and find out what your best financing options are.
Below we’ll answer some common FAQs on vacation property mortgages and secondary home mortgages in B.C.
How much can I borrow to finance a vacation home or second property in B.C.?
The simple, but not so ‘cut-and-dry’ answer, is that you can potentially borrow 90 – 95% of the value of a secondary home in B.C.Read more
However, before you go knocking on bank doors to close on a cute little cottage you saw on vacation recently, you should be aware of the likelihood of getting this type of mortgage. That caution goes whether or not you already own a primary residence.
The amount you can borrow to purchase a vacation home or secondary property in B.C. can depend a lot on the specifics surrounding your case.
Generally speaking, the lenders (i.e. the banks), would be open to financing in a ‘secure’ situation. That is, one in which they can easily reclaim their money by selling your property (in case you end up not making your monthly mortgage payments). This is called foreclosure.
Of course, foreclosing your property would be a last resort for any lender. So, to avoid that happening at all, they’ll look at how reliable you are to pay off a mortgage they give you. They’ll ask for your current job status, credit rating, and other things. Plus, the assumption will be that if you run into hard times, you’ll pay off the mortgage on your primary residence first.
To that end, vacation property lenders will evaluate applications based on the following criteria:
(Click an item below to read more)
The location of the home
You know what they say: location, location, location! This applies to vacation homes or secondary homes too.
For example, is the secondary property in a city centre or popular suburb where lots of other people want to live full time? If the answer is yes, it would be a much safer bet for a lender – at least when compared to an off-grid cabin in the woods, 3 hours away from the nearest grocery store.
A desirable home in a populated area is labelled a “Type A” property. They are considered the most ideal investments of this nature. They are mortgaged the same as a primary home purchase. In other words, you can borrow up to 95% on the price at closing. That’s just 5% down!
There are also “Type B” properties. These can still qualify for mortgages of up to 90% on the purchase price (i.e. a 10% down payment).
Examples of Type B properties would be seasonal vacation homes or second lodgings in a nearby city. They are still located in somewhat developed areas. However, Type B properties are not where people typically work; they are where people ‘play.’ They are expected to be used once-in-a-while, no matter who owns the place or uses it. The good thing is that they give more leeway when attempting to set up an off-grid dwelling, or a cabin without winterization.
Type B secondary properties can’t be refinanced. They also have a cap of 25 years on amortization. Remember, they are slightly more risky for lenders, so they’ll be harder to mortgage.
That said, having a full-time, rent-free tenant on a Type B property, such as a live-in caretaker, could help you get around insurance and risk issues. This, in turn, would reduce monthly costs.
Turning a secondary property into a vacation rental or full-time rental would be another story altogether – keep that in mind. Planning to earn income on a second property would require a different mortgage strategy.
The condition of the property
Let’s say you find a second home in a city centre and you want to buy it. Check! You’re in, right? Not always.
If the place is run down and needs renovation (or, if it’s in a building about to be torn down), this can be a hard sell for any new potential buyer. That goes especially if you don’t have the money to fix it up right away. So, if your second property is not in ‘tip top’ shape, don’t expect that the banks will be eager to lend for this type of asset.
The same limitation can occur when trying to buy an off-grid cabin in a remote location (now we’re talking way beyond the Type B classification noted above). Indoor plumbing, winterization and a long-term, rent-free tenant would help your ‘plea’ with the banks tremendously in this case. But, if the property is only visited 3 weeks out of the year, and wolves are likely to make it their den, don’t expect to get a mortgage for this type of home.
If you’re still determined to mortgage these types of properties, we won’t shrink back from trying to help you! Give us a call and we’ll see what we can do!
Your credit score and borrower history
Just like when you purchased your first home, your quality as a borrower will matter when trying to buy a vacation home or second property. You will need a credit check, proof of income, and all the typical paperwork that goes into buying a home.
It’s always best to get a mortgage broker to help you prepare your application for financing. They’ll know what information to provide, and can review your paperwork before sending it to the lenders. This can increase your chances of being approved for a loan.
Call us today, and we’ll better your chances of getting approved for a vacation property mortgage!
Can my friends and I pool our money together to buy a vacation home, and share the mortgage?
This is another major consideration when seeking a mortgage for a secondary home. It makes sense to own just a share of a property that you’ll use occasionally. Why pay for something that’s just sitting there, right?Read more
However, setting up a co-ownership or fractional mortgage can be extra hard in this situation. This is more so because the home is not being permanently inhabited by one person (on purpose, of course – it’s a vacation property!). It’s not the same as putting two people’s names on a mortgage title. It’s also not like co-owning a home that is being used for rental income.
Let’s say there are four of you. Each of you owns 25% of the home and each uses it 3 months of the year. Your three friends are paying on time, but you start to default on mortgage payments. That leaves the lender with 25% equity in a property that is not paying them back. They will need to reclaim cash for it.
Who wants to buy into that arrangement? It is harder to sell partial equity in a home when other people are using it ¾ of the year. A lender would have to be willing to take the risk of holding their money in a potentially non-liquid asset.
Even if you can get this type of fractional mortgage, it can come with even more limitations and higher interest rates than what we’ve noted above. Your down payment may need to be higher, too.
A good mortgage broker can help in this situation. They can save you a lot of headaches when trying to find a lender who will mortgage a co-owned, private-use home. They will know where to apply off-the-bat, rather than try institutions that are going to impose too many restrictions or fees.
If this is something you’re hoping to do, give us a call or email today, and we’ll get back to you with our best advice:
Can a vacation home be my first property purchase? Does that change the rates I’ll get?
Technically, any property you want to buy can be your first home, even if it is in a vacation ‘hot zone.’ The banks will treat the evaluation factors the same. While we’ve outlined some of the criteria that lenders look for when mortgaging a second home, these could apply to a primary residence, too.Read more
If you want to mortgage a very unique property that is unlikely to sell quickly on the market, you will have a harder time finding a lender, regardless – even if it is your primary residence.
If your credit score is low, you may need to seek alternative lenders (called, “B lenders”) or private lenders to get a mortgage.
If you don’t have a big enough down payment, you’ll need to buy default mortgage insurance.
So in many ways, it’s the same process, with the same rules, and the same rates.
Here is where things become a little different, price-wise:
If you can be a full-time resident in your home – even if it is a little cottage on a lake – you can save considerably on home insurance and mortgage interest rates. These can be 0.10% to 0.25% less if the home is owner-occupied. You may even get a longer amortization period. You’ll also have more flexibility when refinancing or renewing your mortgage later.
The main reason that vacation property mortgages are marketed as different products, is because they usually come with higher risk for banks. But, there are ways to get around that. This brings us to the next strategy we’ll talk about. It comes in handy when you already own a home, and have built equity in it.
Can I refinance my current mortgage to buy a second home or vacation property?
Yes! For some people, this can be the most advantageous way to obtain a secondary property or vacation home. The equity in your primary home can be used with much more flexibility, and with a lower interest rate, than trying to obtain a mortgage on a second property.Read more
When refinancing, your home equity take out can reach up to 80% of the current appraised value on your home, minus your mortgage balance. This means that in most cases, the cash from the equity take out can be used towards a larger down payment on a vacation home. It is rare that you can buy a vacation home using all the equity, or value, in your current home. But if you own much of it already, it’s possible.
When you have a larger down payment to make on a secondary home, the risk factors mentioned above are reduced considerably, in the eyes of a lender. That’s because they would be loaning less.
Match that large down payment with a rapid-turnover property, and you’ve most likely got yourself a deal!
Owning a second home or vacation property can be achieved in multiple ways; a Vancouver mortgage broker can help
While above we’ve explained the restrictions that come with mortgaging a second home, not all hope is lost! A good mortgage broker can find the right lender for your case, and at the best rates you’ll likely find on the market.
Owning a second home is not just for the ‘super rich.’ Many homeowners have second homes or vacation homes that they buy for practical reasons, or even as investments. They can be smart ways to hold money in appreciating assets. Or, they can provide reasonable cost-savings compared to renting hotels or VRBOs when taking holidays.
We’re equipped to advise on the mortgage scenarios that will align with your finances. We’ll aim for that 95% loan-to-value, if you qualify for it. We have connections with lenders that can get you those amazing rates, even on a second property.
Don’t wait; call us today, and we’ll get started!