How to Buy a Vacation Home: What it Takes to Buy and Own a Second Home

Posted by Team on Monday, December 4th, 2017 at 8:44am.

What to Consider Before Buying a Vacation HomeA vacation home not only gives an owner a beautiful place to visit whenever they want a break from the norm, it also opens the door to secondary income if the owner chooses to rent out the home during parts of the year. The rules of Canadian real estate change from primary residences to secondary vacation homes though, so keep the following in mind before contacting a real estate agent to buy a home.

Practical Concerns

Before deciding on a location, a buyer should thoroughly know the area, be it in the Magrath real estate market or elsewhere. Rental rules change from place to place, and they may directly interfere with when and how you can rent the property out. In addition to local ordinances, building and zoning laws can make it difficult to maintain basic utilities such as plumbing, gas, or electrical features on the property. For example, you may not be able to dig in certain areas to protect the land. Finally, some vacation homes in Canada are ultimately not a good long-term investment for individuals or families. Prospective buyers should be comfortable with buying the home for their own use rather than counting on the rental to net them a profit.

Types of Homes

There are two types of vacation properties in Canada: Type A and Type B. Both homes require the owner to live at least part of the time at the home rent-free. It's considered a rental home if the buyer is collecting rent all-year round (even if they're collecting rent from family members.) Type A homes must be winterized for the entire year with central heating, and they must have standard home amenities like electricity, plumbing, and running water.

A Type A home is also required to have a foundation below the frost line, and they cannot include timeshare or rental pool properties. If the home is only meant for certain seasons and doesn't have a permanent foundation, then it's considered a Type B home. A Type B home does not need a heating source, though it does need running water. Both kinds of homes allow family or friends of the owner to stay on the property rent-free.

Down Payments

Financing a vacation home can be so complicated that many owners choose to refinance their primary home and pay for their rental property in cash. Interest rates for second homes can be up to 0.2 percent higher because the owner won't be at the property year-round. When it comes to a Type A home, lenders have more forgiving financing rules. For example, owners can put down as little as 5 percent of the total cost of the property, and owners can use traditional funding sources for their down payment.

They also have options for different types of financing terms available (e.g., fixed, variable, etc.) Type B properties must be purchased with the buyer's own resources, such as a personal savings account or a retirement account. Buyers will need at least 10 percent of the down payment for Type B homes, and there is usually no refinancing option.

Additional Considerations

Lenders may have different requirements for vacation homes—even when the buyer can put down a substantial down payment. They may stipulate CMHC insured financing, which can limit the buyer's power by restricting the maximum value of the loan. A buyer may also be required to put up to 40 percent down payment on a non-insured property, and they're required to put down 50 percent on un-serviced land.

By Justin Havre


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