Homeownership is a notable life goal for many people. However, sometimes people aspire to purchase more than just one property. People looking for a getaway residence, family vacation property, summer home or a new stream of income are all likely to opt for a second home in Canada.
If you want to buy a second property, you will almost certainly need to secure a mortgage for it. However, second home mortgage rules in Canada vary from that of a traditional mortgage. If you are looking to qualify for a second home mortgage, here are some requirements you should be aware of.
Down Payment Requirements
The down payment for a second home in Canada will be considerably higher than that of a regular home. This is because lenders need to make sure the borrower won’t default on the mortgage and is financially capable of funding the purchase of the property.
A second home down payment requirement in Canada 2022 ranges between 20 to 30%. Down payment requirements vary depending on:
- The locality you purchase your property in
- The property’s appraised value
- The borrower’s credit and income qualifications
- The borrower’s savings
- Budget for the new home
Homeowners in Canada typically contemplate taking out a home equity loan or cashing out on their first property to acquire funds for the down payment on a second home. The value of the first home is used as collateral for the second.
Home equity loans are not very expensive. Closing expenses are not usually included in home equity loans, but this might vary depending on the lender. Interest on a home equity loan can also be tax-deductible in some instances.
Credit Score Requirements
The credit score of a borrower is just as important in a second mortgage as it is in the first. Lenders prefer to see a good credit history and a high score when qualifying borrowers.
When evaluating your loan application, the lender looks at your credit report and considers your credit score. A credit report contains information about the many types of credit accounts you have open, along with your payment history. Any records of late payments or unpaid accounts are recorded with your credit report.
Lenders generally look for a credit score of mid 600s to 700 or above and a good repayment history over the past year. This helps them understand the borrower’s credibility.
If you have an insufficient credit score you can take certain measures to improve it. This includes:
- Paying back any and all debts you have incurred
- Aim for a credit utilization of 30% or less
- Increase your credit limit
- Use secure lines of credit
- Get a credit transfer or peer-to-peer loan
- Re-check your report for any errors
There aren’t many second home mortgage rules in Canada but one common guideline is to always have stable employment and a good flow of income when applying for a mortgage. This helps lenders know you are a reliable borrower and in turn, improves your mortgage terms.
Your second home down payment requirement in Canada 2022 will also heavily rely on your income status. The lender compares your revenue to your other monthly costs, such as the mortgage on your first property, utilities, and other debt payments. This is to ensure you have a sufficient income that can comfortably cover the mortgage on your second home.
Your debt-to-income ratio is also taken into account. Your credit score and the size of your down payment may affect the debt-to-income (DTI) requirements for a second home mortgage. In general, the more money you put down and the better your credit score, the more likely your lender is to let you have a higher DTI.
Lenders typically prefer a DTI of 36% or lesser.
Equity and Assets Requirements
You can use the equity in your current home or refinance your loan to acquire enough financing for your second home. The funds from a home equity loan or a cash-out refinance could be utilized to make the down payment.
Taking out a general refinance loan on your current mortgage can lower your monthly payments by lowering your interest rate and lengthening the repayment term, allowing you to save money each month.
However, exercise caution when utilizing these options. Consider the interest rate differences and whether you will have long term benefits.
When it comes to assets evaluated for a Second Mortgage Ontario, lenders prefer liquid assets like savings account funds. This helps lenders know the borrower can comfortably handle the loan and use external assets to repay any remaining amount in case of overdue payments.
Outside of documentation and paperwork lenders also require certain qualifications for the property you are looking to mortgage. Some property requirements for a second home in Canada are:
- The property must belong to the borrower of the mortgage.
- The property cannot be used as an investment or rental property and is not eligible for rental purposes.
- The borrower needs to reside in the property at least once annually.
- The property needs to be a home that can be used annually. Properties designed for specific seasons, such as a summer home that cannot be used the rest of the year, cannot be mortgaged by most lenders.