Vacation and Second Homes
Many Canadians own vacation homes, such as cottages, in addition to their primary residence. To buy these second homes, a mortgage is often necessary. Vacation property mortgages are very similar to primary home mortgages but there are some differences worth knowing about.
From the perspective of a lender, not all vacation properties are the same. Many divide vacation properties into two categories: Those that can be accessed year-round and have a solid physical foundation, and properties that aren’t accessible or used year-round and have a weaker structure. An example of the former kind would be a cottage used in every season, whereas the latter is typified by a cabin in the woods only used during the summer and fall.
Here’s why the difference matters. Lenders will extend mortgages to year-round vacation properties in much the same way they grant mortgages to primary residences. As such, you can choose between a fixed- or variable-rate mortgage at competitive rates. The down payment will also be similar to a primary residence.
If you want to buy a vacation property that falls into the other category, however, the interest rate will be higher and the bank will stipulate a much higher down payment (35%, for example). These stringent requirements are based on the lender’s reasoning that the property cannot be re-sold as easily as a more accessible, sturdy secondary home.
Importantly, the big banks often refuse to grant mortgages to the second kind of vacation property, although smaller, alternative lenders will sometimes fill this void.
The government’s mortgage insurer, the Canada Mortgage and Housing Corporation (CMHC), no longer provides insurance for second homes/vacation properties. That said, the two private lenders, Genworth Canada and Canada Guaranty, do (although Canada Guaranty does not finance riskier vacation properties).
Financing a vacation home
Given that mortgages for vacation homes are more onerous than for primary residences, some people choose to refinance their main home in order to buy a vacation property. At one level, this makes sense, because the interest rate and terms and conditions will be more favourable.
But if you’re thinking of going this route, it’s important to not overstretch yourself financially. Taking equity out of your current home to buy another one may seem like a good idea, but you may be taking on more debt than you can reasonably carry.