Vacation and Second Homes

Homebuyers can qualify for a vacation and second home mortgage by leveraging their home’s equity.  The housing market in Ontario is seeing home prices rise quickly providing opportunities to Canadians to achieve the dream of a vacation or recreational property such as a cottage on the lake or a cabin in the woods. Second home mortgages are also used to purchase rental properties or for houses that can turn into investment opportunities such as renovating and reselling. With record low interest rates, and borrowers with the ability to qualify, a vacation or second home may be the next steps in your financial evolution. Homebuyers with sufficient credit history, stable income and an established credit rating may qualify for a lower rate mortgage. However, there are options for buyers with bad credit and for those that may not meet typical qualifiers like self-employed borrowers.

These mortgage lenders will consider the loan to value or LTV of your house. This is the amount of the loan compared to the value of the home. Usually mortgage lenders, including private lenders, will typically approve LTV up to 90 – 95% enabling homeowners to benefit from utilizing the home as an asset and leverage the home equity built over time.

How to calculate loan to value: mortgage loan amount ÷ home value X 100

Having a mortgage broker assist with to determining options, suitability, and qualification, including for bad credit situations, is always recommended.

Vacation and Second home mortgages can be used for;

• Recreational property such as a lakefront cottage
• Pied a terre in downtown Toronto
• Secondary home for commuting
• Investment property
• Rental property
• Renovate and sell

There are several types of mortgage products borrowers can choose to purchase a vacation or second home:

• Mortgage Refinance: The lowest rate option is a mortgage refinance. Homeowners can tap into their home’s equity and quickly have access to cash for investment. As home equity increases in Toronto and cities across Ontario, along with low interest rates, homeowners may want to consider this option.
  
  
• Home Equity Line of Credit – The home equity line of credit or HELOC enables access to the home’s equity, just in a different way. Instead of a single (or lump sum) payment, a HELOC provides on-going access to certain amount of money, similar to a credit card, but with a much lower rate. The amount of the HELOC depends on the value of the home.

  The benefit of a line of credit is that payments are interest only payments and homeowners can access it when needed. Downsides include variable interest rates and access to the total amount of the HELOC, that could lead to more unwanted mortgage debt. That being said, there are opportunities to lock in rates to protect monthly mortgage payments.

• Second Mortgage – An alternative option for homeowners to access their home’s value to obtain a loan for investment, without paying penalties. While interest rates for second mortgages tend to be higher, it may be a viable option for investing. Speak to a mortgage broker to understand the costs associated with a second mortgage.
  
  
• Private Mortgage – When homeowners cannot qualify a mortgage refinance through a bank mortgage debt consolidation or a home equity line of credit (HELOC), private mortgages may be an alternative. Since private mortgage lenders will secure a mortgage debt consolidation against a home, the interest is usually lower than high interest debts like credit cards.

  Private lenders usually charge a higher interest rate and fees than a bank, given the higher level of risk, however this option still reduces interest costs over time. This is because these lenders understand that situations exist such as quick turnaround for financing, bad credit, non-stated income and non-conventional properties.

  Typically, private mortgages are shorter term products and only require the interest portion to be repaid. Private lenders evaluate risk differently than traditional lenders and will consider the borrower’s ability to repay that is beneficial to self-employed and people with bad credit. Private lenders can also provide debt consolidation options through second mortgages.

• Reverse Mortgage – Homeowners 55 and older are eligible for reverse mortgages that provide access to the home’s equity without having to sell their house. Reverse mortgages allow homeowners to borrow up to 55% of the value of the home. The concept of this mortgage is essentially a reverse loan that means there are no repayments required. Payments to homeowners will be made either in monthly payments or in a lump sum payment. Homeowners will pay the reverse mortgage loan when they move, sell or the last borrower dies. Typically, the interest rate is higher, and there are additional fees associated with reverse mortgages.