How much of a down payment do you need on a second home?
What is considered an owner-occupied property?
Lenders and mortgage insurance providers have their own criteria for what qualifies as an owner-occupied residence. For example, a lender may require you to list the home as your principal residence. The Canada Housing and Mortgage Corporation (CMHC), Canada’s public mortgage insurance provider, defines owner-occupied as having at least one family housing unit that is occupied rent-free by the borrower, a person related to the borrower by marriage or common-law partnership, or any legal parent or child.
It’s essential to confirm your lender’s specific provisions to avoid breaking the terms of your mortgage contract.
How much down payment do you need for a rental property?
Different rules apply when the second property is going to be used as a non-owner-occupied rental, meaning the owner intends to rent out all of the units in the building.
In general, it’s more difficult to obtain financing for these types of purchases, and buyers need a minimum down payment of 20%. This applies to all rentals with four or fewer units.
Mortgage default insurance for second homes
Before buying a second home, consider how the size of your down payment will impact your finances overall. One consideration is the added cost of mortgage default insurance, which protects your lender if you default on your mortgage.
Canada’s mortgage default insurance providers have specific qualifying criteria for second homes. CMHC provides insurance on a maximum of one home per borrower at any given time. This means a mortgage on a non-owner-occupied rental or on second home for personal use, such as a cottage or vacation property, is not insurable with CMHC. However, Canada Guaranty and Sagen, Canada’s two private insurers, offer mortgage default insurance on second homes, with a 5% down payment requirement.
How to finance a down payment on a second property
To purchase their first home with a top-tier lender such as a major bank, buyers must often prove that their down payment is not borrowed money. This is not the case with second homes. While it may be financially prudent to save enough money for the down payment on a second property, it is common for buyers to finance (borrow money for) the down payment.
There are different options available to finance a down payment on a second home, including: