25 Oct 2019

Fall happens to be probably the best time to consider buying a second home up north. The thought of you sitting by the fireplace and reading your book (while checking your phone every 2 minutes) is a Canadian dream, isn’t it? What if I told you that  buying a second home isn’t as hard as you think, and, is a more and more popular purchase that a lot of Canadian buyers are doing these days. And Fall is a great time because of all the people looking to exit the cottage market before winter!

“But I thought I need to have a huge down payment to buy another property?”

No. Not at all. The minimum down payment on a second home that you intend on using/occupying/having family live in, is 5% or equivalent. This means: $500,000 or under = 5%. Any dollar over $500,000 is 10% of that amount. So I call it – 5% or equivalent. The drawback is obviously you’ll pay a high CMHC fee, and can amortize over 25-years. However the minimum threshold is only 5% here, so if you’re cashflow rich but don’t have the necessary capital, it’s still a very easy way “in” to the second home market.

This assumes you’re buying a 4-season home (cottage). If you were to purchase a 3-season property (which is considered a “type-b” property, where there’s no year-round access, and/or there’s not a constant heat source, and well – it sounds like what it is: a property you can only use from spring to fall, then the down payment goes up to minimum 10% down. You will still pay CMHC insurance, and amortize over 25-years, but you’re able to get in if, again, you are cashflow rich but capital poor.

I’m using a cottage as an example but this applies to: second homes close to University, condos downtown, townhouses for your parents etc., This can apply to any second home location that’s not considered a rental. Your plan is not to generate rental income and offset rental costs from the property- at all.

The stress-test did not make this easy. Keep in mind the $1:$4.5 rule. If you want to buy a second home, and have 5-10% down, you need to qualify for your current debt you have, and, the debt you will take on.

But what if I don’t own in Toronto but want a cottage anyways? Ah! Yes! A growing base is doing this also and it does make sense and can happen easily. It’s possible for someone to rent in 416 and own in 705 and beyond. The only thing here to watch out for is: make sure your “shelter cost”. Most lenders assume that adult people don’t live rent-free, so most will add about $600 per month to shelter you in 416. Cheap, I know, but we have to add it.


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