Second mortgages in Canada: What rules apply?

• How you must use the property, i.e. for your individual use (e.g. as a second home or holiday home) or as a rental or investment property.

• Whether the property is owner occupied or not, i.e. whether you reside in it (alone or with a tenant) or rent all of the units within the constructing.

If the second property is for your individual use, similar to a vacation home or holiday home, you’ll likely need to fulfill the identical down payment requirements as your first home. For example, a second home purchased for $800,000 would require a 5% down payment on the primary $500,000, plus 10% on the portion above $500,000.

For owner-occupied rental properties — for instance, a house where the owner lives on the bottom floor and a tenant lives within the basement — the identical rules generally apply, says Elan Weintraub, co-founder and mortgage broker at mortgageoutlet.ca.

However, if the property will not be owner-occupied, meaning it’s fully rented, Weintraub says it’s best to put down at the least a 20% down payment, whatever the price of the house. He adds that certain lenders have different requirements.

Lenders take owner-occupancy issues seriously, so at all times be honest about your plans, Weintraub advises. “If you say you’re going to live in the property, then that’s the expectation, and depending on the lender and the mortgage type, you could default if you don’t live there.”

Should you’re taking out a mortgage on a second property?

Managing two mortgages is a giant financial commitment, so it is important to plan ahead and seek expert advice in the event you’re unsure whether you’ll be able to afford it.

According to Weintraub, there are several key aspects to think about before deciding on a second home mortgage. These include:

• Your financial situation: Do you could have extra savings in case, for instance, the roof collapses, the tenant stops paying the rent, etc.? Buying a second property may be dangerous in the event you use up all of your savings on the acquisition and haven’t any room for unexpected expenses.

• The time required: A second property (especially a vacation home and/or rental property) could require a whole lot of care and a focus. Do you could have the time to handle the property yourself or the cash to pay for these services? If not, owning a further property might not be something you could have time for.
• Your income stability: How secure is your job or business? Are you sure you should have the income you have to proceed making payments on two mortgages? If you’re unsure of your future ability to pay, you might not have the financial means to own multiple properties.
• Your time horizon: If you propose to sell the property in just a few years, you might not have the ability to recoup the fee of your original investment. There are many upfront costs to think about when buying and selling real estate, including transfer taxes, real estate agent fees, and legal fees.

Second Mortgage Interest Rates in Canada: What to Expect

Whether you select the identical or a unique lender to your second mortgage, the rate of interest will likely be higher than your first mortgage. That’s because your second mortgage has the second highest priority: If you foreclose on your private home, the debt you owe to your first lender have to be paid off first. Therefore, your second mortgage lender takes on more risk and is compensated for that risk with a better mortgage rate.

Bear in mind that you’re going to also must pay the identical administrative costs as your first mortgage, including appraisals and legal fees. In addition, Weintraub stresses that money flow needs to be one other consideration. “You would need a high income to purchase a second property because you would have significant debt – a mortgage on your primary and secondary residences.”