Are you looking to buy a second home? There are many reasons to do so and property is always a good investment, especially in Canada. Maybe you are looking for a getaway in the mountains or by the lake where you can escape for the holidays with family and friends. You may want to buy an investment property or a condo for your children as they leave the nest.
Whatever the reason you are looking for a second home, one thing is for sure. You need to pay for it. If you have enough money kicking around that’s awesome. Just shop around and find what you are looking for and make an offer. For those that don’t have that kind of funds, you will need to get financing. It can be challenging to find a lender willing to give you a mortgage on a second property but don’t despair.
Here are some examples of how to finance a second home:
1. Refinance Your Existing Mortgage
For people that have owned their homes for a while, they have taken advantage of the bullish market and built up a large amounting of equity. If you don’t have any down payment for your second home, you can refinance your principal residence and take money out. You earned it through making mortgage payments and gaining equity so it is yours to spend as you wish.
If there is enough equity in your home to fully pay for a second home then you could do that and continue to pay your new refinanced mortgage. This new mortgage replaces your original one, with different terms and payments. You may be able to get a better deal when you refinance too.
2. Get a Second Mortgage for the Property
Getting a second mortgage for the property is one of the best ways to finance a second home. You will typically get up to 85% of the equity in your home for the mortgage and it is basically a secured loan against your primary home. You still have to be able to make two mortgage payments and lenders have a formula to figure out if you can reasonably make the payments.
3. Home Equity Line Of Credit
A home equity line of credit or HELOC, is a revolving line of credit that you can draw from and make payments to. It is very flexible and allows you some freedom for using the line of credit for purchasing your second home. As you make payments against the HELOC you gain more available credit, like using a credit card with a large limit.
Remember that this home equity loan is a loan based on the equity you have and uses that as a guarantee you will pay the loan back. This is the perfect solution for using your primary residence to fund your second home. It is flexible and always there when you need money, up to the available limit of course.
4. Alternative Mortgage Lenders
There are many “B” lenders that are available to finance your second home if you need a different solution besides the banks. Traditional banks have strict lending rules and requirements so it can be hard to qualify for the money you are looking for. Alternative lenders aren’t governed by those rules so they have more flexibility when lending money.
They are also more interested in the amount of equity you have rather than just your credit score and employment. This may be ideal for you if you have had a few dings on your credit. These lenders have come in to help those who can’t get a traditional mortgage by filling the gap the big banks left.
5. Reverse Mortgage
You can use a reverse mortgage to fund the purchase of a second home if you want. To qualify, you must be 55 or older and have equity in your primary residence. The amount of money you can receive will depend on your age and the value of the second home but you can only get up to 55% of your primary home’s worth. There are no monthly payments with a reverse mortgage as it is essentially a loan that comes due when you die or sell the home. Also, over the life of the loan, the homeowner’s debt increases and home equity decreases.
It can be exciting to buy a second home, whether it’s for personal use or investment and the advantages are many including:
- Investment diversity
- Rental income
- Vacation location
- Long term profits
These are all great reasons to buy a second home. It may be a little challenging if you don’t have the money to buy it outright but by using one of the above strategies, You will finance the purchase and even joy all the benefits of second home ownership!