In this article, we provide an overview of mortgage requirements for purchasing or refinancing a second home, such as a summer home, cottage, or other recreational property, including foreign property.
The General Thought on Purchasing a Summer Cottage or Vacation Home
- Changing lifestyles affect the decisions Canadians make on how and where they choose to live.
- Second homes are very popular for weekend and vacation getaways.
- Conversely, second homes are a popular way to decrease the weekly work-day commute.
- Second homes are popular for housing your university-bound child.
- It is possible to finance a second property with owner-occupied (best) interest rates and rules.
Cottages / Vacation Homes are Classified as Types A & B
Type A Cottages Requirements:
- Must be intended for occupancy as some point during the year by the borrower or relative on a rent-free basis (otherwise it is considered a rental).
- Winterized home with year-round (4-season) access.
- Potable running water, central heating, plumbing and electricity.
- Permanent foundation below frost line.
- Property needs to be readily marketable (easy to sell).
- Floating homes are possible.
- Rental pool / timeshare properties are NOT eligible.
Type B Cottages Requirements:
- Seasonal (summer road only) or boat access okay.
- Must have a kitchen, three-piece bathroom, bedroom and a common area
- Permanent heat source NOT required.
- Has running water, need not be potable.
- Toilet can be chemical, portable or holding tank
- Sits on a foundation (concrete blocks or pilings).
- Generally 850 sq ft or more
- Off-grid power likely OK if 50% down payment.
- Must be intended for occupancy as some point during the year by the borrower or relative on a rent-free basis (otherwise it is considered a rental).
- Cannot be used as your full-time home.
From a Mortgage Planning Point of View...
- In addition to the property requirements above, you must be able to personally qualify for mortgage financing.
- Interest rates might be 0.10-0.20% higher than a traditional mortgage mainly because property is not ‘owner occupied’ year round.
- For more remote property locations, many lenders will insist on CMHC/Sagen-insured-lending regardless of the down payment provided, but conventional is possible for quality properties.
- Type A cottages can be mortgaged as a 'second home', similar to mortgaging a permanent residence, fixed and variable terms, with as little as 5% down payment (if insured).
- Type-B require 10% down minimum down payment as a second home purchase with CMHC/Sagen loan insurance, not to exceed $500,000 (although some exceptions available on case-by-case basis).
- Type-A can be refinanced provided 20% equity remains in property and a quality property.
- Type-B generally have limited to no refinance options.
- The minimum down payment for a non-insured property purchase varies by lender from 20-40%.
- Insured mortgages may have further restrictions on the maximum loan amount depending on location and access.
- Many borrowers prefer to refinance their existing primary residence (mortgage or home equity line of credit) and pay cash for the second home, as it is often easier.
- Draw/construction (progress-advance) mortgages are available.
- Financing on raw (un-serviced) land usually requires 50% down payment, though ~25% is possible for prime locations (for example, an un-serviced lake lot).
- It is important to note that cottages and 2nd homes can not be used for investment purposes or as a rental; lenders do not accept rental pools or timeshare properties under this program.
- Properties within resort/RV communities are generally unacceptable.
- Finally, it is implied that the property is located in Canada.
If you have any questions, please contact us.
If you are interested in financing a foreign property, please continue reading below.
Mortgage for a Second Home in USA, Costa Rica, Panama, or Somewhere Else Warm
- Understand that Canadian lenders will only provide you a mortgage if they can register their mortgage against a Canadian land title or deed in a Canadian (not foreign) land title system, using Canadian lawyers in order to enforce the contract in a Canadian court, if ever required. Put another way, Canadian banks will lend on Canadian properties only.
- This rule holds true for lenders in other countries as well - they will only lend on properties within their legal jurisdiction.
- Option 1 - deal with a local bank in your target country.
- For the USA, where language and rules are quite similar to Canada, this can be fairly straightforward.
- In other countries, getting a mortgage locally can be time consuming, exhausting, and expensive
- We have noticed that HSBC and Scotiabank are often active in these warmer places, but you have to visit a local branch on your next visit.
- Option 2 - for many, refinancing your principle Canadian residence and using the equity to purchase your foreign home is by far the simplest and cheapest finance solution.
- Up to 80% of the value of your home can be refinanced, for example: if you have a home worth $500,000 and only hold a mortgage of $250,000 you can refinance to $400,000, payoff the $250,000 mortgage and use the other $150,000 to buy a vacation home.
- The interest rate will be lower because you remortgage your permanent residence and have no mortgage owing on the vacation home.
- Makes it simpler and faster to buy in the foreign location.
- There are no restrictions on the use of the vacation home, such as if used for a rental
- Click to see a blog on this topic
- Option 3 - buy a Canadian rental property with 20% down, use the rental income to pay down the mortgage and use the surplus to finance your annual trip to some place warm. Much easier to manage when the property is close-at-hand, no rogue property managers renting out your foreign place under the table, no foreign tax rules or compliance issues, Canadian laws if something comes off the rails, and likely a much better return on investment.
- Please note, Canadian banks will lend on Canadian properties only. As such, we are able to advise on Options 2 & 3 above only.
