Ways to finance a second property
Often the best option is to refinance your current mortgage.
Mortgage refinancing means getting a reevaluation of your home and then redoing your mortgage based on the current value. This will allow you to tap into the equity your home has built over the years, and pull out the extra funds for a down payment on your secondary property. When using some of your current equity, keep in mind, that it will increase the principal amount and the interest payments on your mortgage as the mortgage is refinanced at a higher amount.
There is a second option to unlock your home equity, which is through a line of credit or a HELOC, which stands for “Home Equity Line of Credit”. This option allows you to borrow money using the equity in your property, with the property as collateral.
A HELOC serves as a revolving line of credit to allow the borrower to access funds, as needed, letting you utilize as much (or as little) equity as required. HELOC payments are unique as they are interest only payments versus regular mortgages, which have both Principal Interest and Tax added on. Another benefit to utilizing a HELOC is that you will only pay interest on the amount you actually use! This can provide financial breathing room, especially during tight months. That said, if you do choose to pay the interest as well as a portion towards the principle, it can help you pay off the loan much faster.
You can utilize a HELOC by tying it to your existing mortgage or applying for it separately.
In Canada, you are able to borrow up to 65% of your home’s value using this method. However, keep in mind, your HELOC balance AND current outstanding mortgage cannot exceed 80% of your home’s value when added together.
Co-ownership? It’s on the rise
Co-ownership is rising in popularity as budgets are stretched thin across the country. Co-buyers can include siblings, parents with children, unmarried partners, friends, and more.
Given rising home prices, some would-be home buyers have to get creative to make their homeownership dreams a reality. And co-ownership is becoming a viable option for many. However, there are a few things to consider:
1) Understand the process – you’ll want to know all parties involved in the purchasing process (lawyers, realtors, mortgage professionals who specialize in co-ownership scenarios), as well as the costs that will be incurred (such as legal and realtor fees). Know the existing rules and regulations of your province surrounding co-ownership. For example, Ontario and BC offer comprehensive guides on property co-ownership.
2) Establish trust and define the property’s purchase – Will the property be for long-term investment or rental, principal resident or a short-term investment or rental.
3) Iron out the details such as – how will legal, real estate and other costs be divided? What Happens if one party dies or decides to sell early?
Intent to Rent
If you are purchasing a secondary property – whether a vacation home or investment property – there are a few differences if the intention is to rent. Before you look at purchasing a rental property, there are a few things to consider:
1)The minimum down payment required is 20% of the purchase price, and the funds must come from your own savings; you cannot use a gift from someone else.
2)Only a portion of the rental income can be used to qualify for and to determine how much of a mortgage you can afford to borrow. Some lenders will only allow you to use 50% of the income added to yours, while other lenders may allow up to 80% of the rental income while subtracting your expenses. This can have a much higher impact on how much you can afford.
3)Interest rates will usually have an added premium on them when the mortgage is for a rental property versus a mortgage for a home someone intends on living in. The premium can be anywhere from 0.10% to 0.20% on a regular 5-year fixed rate.
Rental income from the property can be used to debt service the mortgage application, but do bear in mind that some lenders will have a minimum liquid net worth requirement outside of the property.
Along with the added monthly cash flow, rental properties have the added benefit of being able to write off interest on ANY money used for the rental, even if it is pulled from your primary home’s equity. Also, if you do eventually want to sell this property, do note that it will be subject to capital gains tax. Your accountant will be able to help you determine potential write-offs and required tax payments if you do decide to sell in the future.
Before you jump into the purchase of secondary property, consult with a Dominion Lending Centres mortgage professional. They can help review your financial situation, current mortgage and equity, and help you make a plan. The keys to success are right around the corner with a little bit of expert advice!