How Much Do I Need for a Second Home Down Payment in Canada?

November 5, 2020

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You’ve already achieved your dream of homeownership, and now you’re starting to think about a second home now. Maybe it’s a nice vacation home so that your family can spend the summers relaxing by the beach or the winters hitting the slopes. Maybe you’re looking for a new place to live but realize that your current place is the perfect rental unit.

Whatever your reasons for wanting a second home, you need to be prepared.

Carrying two mortgages makes you a riskier investment to the mortgage companies, so you’re probably not going to be able to get the same great deal that you got on your first mortgage.

The good news is that buying a second home is definitely doable. We’ll help you understand what you need to get started.

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Second Home Mortgages

If you’re looking at a second home that you’re going to live in at least part-time, you may be able to qualify for a mortgage with just a 5 percent down payment. This makes it super-affordable, but you’ll need to qualify for that mortgage with your income alone, and the bank will be factoring in the expense of your first mortgage. Of course, when you go this route, you’ll have to also pay the mortgage insurance.

If you can afford to make a 20 percent down payment, this will be your best bet. It’s easier to qualify for a mortgage with this much of a down payment, and it will be a conventional mortgage without the mortgage insurance premiums. 

Income Properties

In the past, people were able to purchase a second home as an income property with just 5 percent for the down payment, but those days are long gone. The risk is too great, so lenders now require investors to have at least a 20 percent down payment for an investment property. Some will even require 25 percent.

Don’t forget to ask the bank what counts as income for qualifying for the mortgage. Since you’re going to be renting the second home, you should be getting income from that. Many lenders will add this income to your earned income, making this second home more affordable. But it’s important to know just how much of that potential rental income will count. The bank may have different ideas about how much you can rent the property for.

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Getting that Down Payment

Now that you know how much money you’ll need (somewhere between 5 and 25 percent of the cost of the home), you can start making some plans to get that money together. The most obvious way to get a down payment is to save up little by little as your budget allows. For most people, though, that’s pretty slow going.

Instead, you could consider using the equity in your current home for the down payment. This is called a Home Equity Line of Credit (HELOC) or a Home Equity Loan. Since it’s a loan, you’ll have to repay it, though, so remember that the lender is going to factor this payment into their decision.

Another possibility is to use equity in a cash-out refinance. If you’re almost finished paying off the first mortgage, for instance, you could refinance the remainder of that mortgage into the mortgage for your second home. Ask your lender about this possibility.

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Other Considerations

There are a few other things you need to keep in mind as you look for a second mortgage. The first is that not all lenders will approve a mortgage on a second home. You’ll be limited to applying through only a few companies. Fewer options can make it harder to qualify because these lenders can be as picky as they want to be.

Additionally, you may be looking at significantly higher interest rates than what you have on your first mortgage. Higher interest rates can result in monthly payments that are hundreds of dollars more. To be safe, talk to a lender about what type of rate you’ll qualify for, then use that rate when you make your calculations.

Getting a mortgage for a second home is surprisingly realistic. As long as you have the right down payment for the type of home you want to purchase, you can make it work. The best thing to do is to talk with a mortgage professional about your plan. They’ll tell you how much you’ll qualify for, and this will give you a better idea of how much you need to save up for the down payment.

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