Buying a second home: How it works in Canada
If you’re able to buy the property outright without borrowing any funds, the process is fairly straightforward. However, if you expect to apply for a second property mortgage, your lender will need to evaluate your financial profile. They will look at your income, your gross debt service (GDS) ratio and total debt service (TDS) ratio, your credit score and other factors to determine if you qualify. Some lenders will allow a portion of the rental income from your future property to count towards your income, increasing the amount you can borrow.
Based on your profile, as well as current market interest rates and other factors, you will be offered an interest rate on your mortgage. That interest rate will have a large impact on the overall affordability of your new home, so it pays to compare offers and shop around for the best mortgage rate you can find.
Once you’re in your new home, don’t forget that you might be able to claim certain expenses for income tax purposes. Every bit helps!
How to finance the purchase of a second home
There are many great ways to save up for a real estate purchase. Many first-time home buyers use their own savings and investments, government programs like the Home Buyers’ Plan or First-Time Home Buyer Incentive, or a financial gift from a family member—or, in many cases, a combination of all three.
Current property owners have another option—they can finance the purchase of additional real estate using the equity in their current home. Essentially, the buyer borrows funds against the equity in their property, using the property itself as collateral.
There are different ways to buy a second, third or even fourth property using equity, including:
Each of these financial products and services has its own qualifying criteria, pros and cons. But in each case, you will need to have more than 20% equity in your current property; lenders won’t let you borrow more than 80% of the value of your current home. Read more about using equity to finance a real estate purchase: How to use equity to buy a second home.