Are you looking to buy a second home? You might run into a few pitfalls, notably with financing.
Getting a mortgage loan for a second home is quite different and more complex than it is for your primary residence. Here’s what you need to know.
What’s Your Objective?
Before you start looking at homes on Centris.ca, you have to ask yourself why you want to buy a second home:
- Do you want to leave the city after retiring and permanently move into your second home?
- Do you just need somewhere to rest with family, to go to during weekends, nearski lodges or during your vacations?
What you are planning to do with the second home is going to help you identify what type of property you are going to look for. This will also affect the type of financing available to you.
A Mortgage Loan?
When you buy your first house, getting a mortgage is relatively easy. The bank will offer you a mortgage based on your solvency and the value of the house.
When it’s a second house, you can also get a mortgage. However, they tend to be more difficult to get, especially if it’s for a basic cottage. Indeed, Les Affaires mentions that “the more a cottage looks like an ordinary house, the easier it gets to get a mortgage loan on it, elements such as its accessibility, the winterizing of the house, and if it has access to drinking water are the key factors that lenders tend to look for.”
Here’s another difference between financing a primary or a secondary residence: a loan for your house in the countryside can’t go over 90% of its value, whereas one for your main house can go up to 95%.
Use Your Home’s Equity
Financial institutions are often more demanding when you are buying a second home. A viable option available to you is to take advantage of a mortgage refinancing, which is using the net value of your main house to finance the purchase of your second house or cottage.
The net value of a property is the difference between its market value, and the debt you still need to pay back. As an example, if your home is worth $800,000 and the balance of your mortgage is $200,000, its net value would be of $600,000. That’s the value you can use to get a new mortgage loan.
Some banks will also offer you a home equity line of credit, which might help you conclude your transaction.
Taxation of a Second Home
The taxation of a second residence is different than the one of your main residence. When you sell your main residence, the capital gain you obtain is tax-free. This is not the case for a second residence: the profit you get when you sell the residence will be taxed.
Get Help From Others
If you are looking for a second home, team up with a real estate broker. They will help you find a property perfect for your needs. They will also guide you through all the necessary steps when buying a second home.