August 20, 2020

Buying A Second Home | What You Need To Know Before Purchasing

To some, the idea of buying a second home is something that is for the wealthy and not for your average person. But the truth is, more and more people are purchasing another home and for all different reasons. Whether you are wanting to buy another home for a vacation house, a rental property, a house to flip and then resell…whatever the reason is, you need to know more about the process before diving in to a huge commitment and investment. 

While the general process is very similar to that of buying your first house, there are still important things to consider before deciding if a second house is right for you…and affordable.

Can you afford a second home?

The first and probably most important step to take before buying a second home is to take a good look at your current financial situation and calculate the affordability of another house. Use a tool like the CMHC Affordability Calculator to help you see if a second house is going to be possible (without you running the risk of not being able to make payments). Getting in touch with a mortgage broker can also help you through this step. They can help you determine an affordable purchase price and discuss current rates. The current market is a buyers market, with low rates and housing prices dropping, so now would be a great time to talk to your real estate agent if you’re considering a second house. Be sure to talk to your agent about your plans for a second home and they can help you find the house that meets those needs. Whether it’s knowing a great neighborhood with good investment properties, or finding you the perfect lakeside cabin, your agent will know how to get you the best bang for your buck. 

Will You Get Approved For A Second Property?

Unfortunately, owning a home does not guarantee that you will be approved for a second one. The process is much the same as it is for buying your first house. A Lender will take a look at your credit history, employment, financial information and the details about the second home you wish to buy. They still consider your debt service ratio and you can calculate yours here. 

You also need to be aware of changes to things like CMHC’s mortgage insurance. If your current home/mortgage is already insured with CMHC’s mortgage insurance, they will no longer insure a second home. What does this mean for you as a buyer? It just means that you will need a 20% down payment for the purchase of the second house. 

What Are Your Options For Getting Financing For A Second House?

Get a Home Equity Line Of Credit

Also known as a HELOC, this is an option for those looking to purchase a second home. This line of credit is a revolving credit that allows you to borrow money, pay it back and borrow again.

Each month you are only responsible for the interest rate payments and insurance premiums and can pay back the principal amount at your own convenience. The home equity line of credit  allows you to borrow up to 65% of your home’s purchase price or market value. 

For example: if you purchased your home for $400,000 and put down a $50,000 down payment, your mortgage balance owing is $350,000. The HELOC limit would be 65% of the purchase price or $227,500.

Refinance Your Current Mortgage and Use Your Equity

When you refinance your home, you are borrowing based on the net-worth of your home. When you choose this route to purchase a second home, you can then use 80% of your home’s estimated value towards the purchase of a second home.

Get A Mortgage Loan

Oftentimes, when someone is buying another home the plan is to have it be their vacation home, so this will affect getting a mortgage loan. If the home is meant to be a year-round home/cottage, you could get financing for up to 95% of its value. If the home is seasonal and not set up for year-round living then your financing can only be for up to 90% of the home’s value. You can still choose a fixed, variable or reduced rate with an amortization period of 25 years. Early repayment options are also available.

Take the First Step To Owning A Second Home

After you’ve considered your budget, financing options and if the overall investment of a second house is going to be affordable the next step is to contact your mortgage specialist. They will walk you through all the steps needed to get your approval and then…the fun part!

Once you’ve received approval the best part of the process comes next, shopping. Contact a local, professional real estate agent to help you find the perfect second home that fits perfectly within your budget. Your agent will be able to get you the home that suits you best based on your requirements for a second home. Is it a cottage? A house for an eldery family member? A rental property? A house to “flip”? Using a trusted agent means you’ve got someone on your team who knows the market, they know a good deal when they see one (and can spot the bad ones too) and you can rest easy knowing they will get you the best possible deal out there. 

With current rates and house prices at an all time low, now is the time to take the leap into buying a second home. Take advantage and grow your investments. Contact your local St. Paul or Bonnyville CENTURY 21 agent today and let’s get you started!

related posts