Owning a home brings a sense of security and a reasonable opportunity to grow equity, so it’s not surprising that many home owners soon start thinking about a second property.
Whether it’s a weekend cottage getaway, a downtown condo that’s a weekday alternative to commuting or an off-campus home for a son or daughter at university, the prospect of a second residence holds out the prospect of both convenience and portfolio-building.
Prospective buyers can take advantage of equity in their existing home, but they also need to meet new conditions from the lender, says Farhaneh Haque, director of mortgage advice at TD Canada Trust.
First, make sure the property qualifies as a second home, she says. It cannot be seasonal and it has to be occupied for at least part of the year by the borrower or a relative.
Next, the lender will need assurance the buyer can afford to carry the second mortgage. “The buyer’s income alone will have to support payments on the two properties,” she says. Rental payments from a son’s or daughter’s university roommates who share the house, for example, will not be considered. “Lenders avoid rooming-house situations as they’re just too transient,” Ms. Haque says.
A bank will also inspect the property’s condition. “We need to be sure that it is in good enough repair that it will at least hold its value over the amortization period we’re lending on,” she says.
For the down payment, buyers must put up a minimum of 25 per cent of the purchase price for a conventional mortgage, or 15 per cent to qualify for insurance on a high-ratio mortgage, a slightly higher standard than for the purchase of a principal residence, Ms. Haque says. The good news is that they can refinance the mortgage on their first home, or obtain a home equity line of credit, to borrow up to 80 per cent of the current value of the property.
Therefore, if a buyer already owes $100,000 on a home that’s now worth $400,000, they could borrow up to $320,000 in total, meaning there could be $220,000 available if they meet the income requirement.
Choosing between a refinanced mortgage and a home equity line of credit, or HELOC, is a matter of preference. “With a HELOC, you could have monthly payments that are as low as interest-only,” Ms. Haque says, and the interest rate would float with the prime rate. “With a mortgage, you have only one payment and it doesn’t change; you know exactly what it will be.”
Ownership also gives you attractive options later: equity or income. When your children have graduated or you retire and you no longer need your condo – or, perhaps, your primary home – you can sell a property and realize your capital gains or rent it. Your investment pays back.