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Refinancing Options for Your Second Home

Refinancing Options for Your Second Home

Buying a Second Home

It’s possible to take out a mortgage on a Canadian cottage or investment property; but that’s not the only method you can use to finance your second home or cottage. In most cases, it’s actually not a good way to go.

Many choose to simply refinance their existing property, and use that fund source to purchase their vacation property anywhere around the world.

Lenders generally finance up to 80% of a property value. For example, if you own your house outright and it’s worth $800,000, you could take out a mortgage on it for $640,000 to go and buy that vacation home in Tuscany (or wherever your heart may roam).

This is really useful information for those of you who want to buy a vacation home or investment property abroad because Canadian banks won’t lend anymore than 80% against a property outside of our borders. Also, as a Canadian you can’t go down to a bank in California and get a U.S. mortgage. Lenders down south are simply not interested in doing so for residents of Canada.

If you can access the funds, refinancing your first home will also facilitate fractional ownership or condo hotel arrangements when you rent out your property while you’re not using it. However, while this option will make sense for some recreational or investment buyers that like to travel, a traditional mortgage on a second home in Canada might make more sense for others.

If clients have the 20% down that they need for a second property, they can do this by way of conventional financing. They can also go with the high-ratio way, by putting down 5% and getting financing insurance from CMHC (Canadian Mortgage and Housing Corporation). But if you’ve got an existing mortgage for your primary residence, and then purchased a lakefront cottage, you will need to show the lender your ability to service that debt before you qualify through all the normal lending procedures.

It’s best to keep in mind that if your property is determined to be seasonal (no permanent foundation, does not have its own heat source, etc.) the mortgage rules will change. A permanent, “conventional” property would normally get a loan for up to 80% of the value to a maximum of $450,000. A seasonal property would only get a loan of up to 65% of the value to a maximum of $350,000.

No matter what you decide, my one piece of advice to give to recreational property buyers is that it’s best to sit down with a mortgage specialist, and figure out what the best options are to suit your needs specifically. Because of the flexibility I can offer you in loan options, you could save a ton in the long run opposed to having to deal with the higher interest rates & restrictions you may find at the bank.

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