In our last blog, we looked at ways you can purchase a new home and rent out your existing one. Similarly, in this post, we’ll explore using your savings to purchase a second home or property like a cottage or recreational home.
When talking about purchasing a “second home”, we mean something like a cottage, recreational property, or a property for your child while they are attending college or university. Second homes can actually be purchased with less than 20% down and are allowed to be default insured. That said, you typically can’t use any rental revenue you might be collecting to help during your mortgage qualification.
For example, imagine you’ve found a cottage for $620K. This property would require a down payment between $37K-62K (the minimum down payment on the first $500K is 5% with the remaining $120K requiring 10% OR potentially a minimum of 10% on the total depending on the type of property). It’s important to recognize that different types of cottages can require different down payment structures.
Assuming 10% down and including your default insurance, your mortgage of just over $575K (on a variable rate of 2.2% and 25-year amortization) gives you a payment of just under $2,500/month. The key here is understanding that you have to be able to carry both mortgages on your total household income with no additional rent or revenue to be added. So you don’t need 20% down in order to purchase a second home and, as long as you can carry both properties with your household income, you can purchase a second home with as little as 5% down.
Here’s a common situation we encounter when it comes to purchasing a second home. A client will come to us wanting to buy a cottage but doesn’t have 20% down and doesn’t want to refinance their home (as they managed to get a really low-interest rate a couple of years earlier). The good news here is that we actually don’t have to refinance assuming you have savings we can tap into!
If our client says something like “I do have access to some cash that I’ve been putting away”, then we’re off to the races! As long as you have a minimum down payment, closing costs and your total household income can carry both properties, we’ll get you approved at the best rate. It’s at this point that they might make a joke about tossing a boat into the deal… let me put it this way, a boat purchase will stop you from getting this mortgage BUT this mortgage will not stop you from getting a boat!
Disclaimer: The opinions expressed herein are just that, and should be consumed as such. Always do your own research when considering investments in real estate or otherwise.
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