So, you are looking to purchase a second property! Congratulations! This is an incredible opportunity and we are here to help provide you with the keys to success to expand your financial portfolio and ensure stability for the future.
Before jumping in, it is important to understand the different financing options to determine which route best suits your circumstances and property goals.
One option for tapping into your home equity for the purpose of purchasing a secondary property is to refinance your mortgage. Essentially, mortgage refinancing means getting a reevaluation on 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.
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. 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.
If you are purchasing a second property with the intention to rent, there are a few things to consider:
- 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.
- 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.
- 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.
You might be surprised to learn that you don’t need to be one of the uber-rich or make six figures to have second properties. You just need to have the knowledge, determination, and a financial plan!