A second house is different from an investment property. It could be a weekend property, vacation home, or even a condo that you use as your home during the week. If a certain situation requires you to buy a second home, you can still find the best window where house prices are within reason. The real issue to deal with is the high mortgage rates, which sit around 5% currently (March 2024). It matters to lenders whether the property is owner-occupied or not. If it is an investment property or not owner-occupied, you will have to meet the lender’s specific requirements to qualify for a loan. Let’s find out if it is the right time for you to buy a second house.
Can you afford a second home in Ontario?
Currently, a detached house costs $1,093,900 on average in the Greater Toronto Area. A 2-bed, 2-bath condo costs $695,000 and a freehold townhouse costs $1,030,000 on average. Real estate is the most expensive in Toronto, Vaughan, and Markham followed by Scarborough, Mississauga, Brampton, and Ajax.
Since this is your second purchase, you will need a 20% down payment to qualify for a mortgage. Beyond that, you need extra funds for closing costs, which includes lawyer fees, title search, home inspection, and moving costs. All in total, you’ll need $10,000 to $15,000 for closing costs.
Let’s break down the costs for a 2-bed, 2-bath condo in Brampton that costs $700,000.
20% down payment – $140,000
Monthly mortgage payments (at 5.09%) – $3,286
These values are based on a 25-year amortisation period.
If you buy a property under $500,000, you may purchase at a 5% down. However, you will also need to purchase mortgage insurance, which is added to your monthly payments. Once you have 20% equity in your second house, you can end the insurance.
How to finance your second home in Ontario?
With your second home, you have more unique ways in financing the mortgage. Here are some ways you can save down payment and mortgage:
1. Home Equity Line of Credit
Think of Home Equity Line of Credit, or HELOC as a credit card, but with a much larger limit based on your home’s equity. The beauty of a HELOC lies in its flexibility; you can draw funds as needed, pay them back, and then borrow again. You can use it to cover down payments or ongoing expenses related to your second home.
Interest rates for HELOCs are typically lower than those for personal loans or credit cards, which makes it a more economical option. But be careful about the payments since your primary home is used as a collateral and failure to pay multiple instalments can lead to foreclosure.
2. Mortgage refinance
Mortgage refinance is recommended to those who are still paying the mortgage on their first home. Through this option, you can consolidate both loans and only make one payment. You can approach your current lender or find a new lender with better terms and lower interest rate. However, note that if your mortgage is not up for renewal yet, you might have to pay a prepayment penalty.
3. Second mortgage
An alternative for saving down payment, you take an additional mortgage loan on your current property and pay a higher interest rate. It is recommended for those who plan to own their second homes only for a few years. When negotiating the mortgage terms, add to remove or deduct prepayment requirements or penalties.
4. Reverse mortgage
Only available for those 55 years or older, you can get up to 55% of your home’s equity as a lump sum amount. The only Canadian financial institutes that offer this are HomeEquity Bank and Equitable Bank.
With all this information, now sit back and calculate how you will manage the down payment, closing costs, mortgage payments, and utilities. If after making all expenses, you are left with 60-70% of your income, now is the right time for you to buy a second house.
If you’re looking for an experienced realtor with years of legal experience, reach out to Catherine Nacar today. She is a realtor from Brampton who has helped many clients in GTA find beautiful second homes. Book your consultation here.