Lake cabin? Mountain chalet? If you’re picturing yourself unwinding in a getaway spot, you’re not alone. More and more Canadians are drawn to owning a vacation property – and for good reason. The lure of escaping city stress, the freedom of remote work, and even the chance to earn extra income through rentals all play a part.

But hold on before you start dreaming of sun-drenched afternoons on your dock. Let’s explore the financial side of buying a second property. It’s a different strategy than your primary home. This blog post will be your guide.

Why Canadians Are Buying Vacation Homes

Cottage country is getting crowded! Seriously, more Canadians than ever are snapping up recreational properties. What’s driving the trend? A couple of big factors:

• Remote Work: Working from anywhere changes everything. Suddenly, that vacation home becomes a very real possibility.
• Short-Term Rental Income: Many owners are looking to offset costs by renting out their places on sites like Airbnb. This can really help cover your mortgage and other expenses.

Just a heads-up: financing a vacation property can be trickier than financing your main home.

Understand the Difference Between a Vacation Home and Investment Property

Lenders see a big difference between a vacation home (your “second” home) and a purely rental property.

• Vacation (Second) Home: You plan to use it yourself for many years. Mortgage rules usually spell this out.
• Rental/Investment Property: The main goal is to generate income from renters.

Lender rules? Expect differences:

• Higher Down Payment: Vacation homes often need a bigger down payment compared to your primary residence.
• Stricter Income Requirements: They need extra proof you can handle two mortgages.
• Different Insurance Requirements: Insurance depends on how often you’re there, the location, and if you’re renting it out.

Key Financing Options for Vacation Properties

There are a few key ways to finance a second home, each with pros and cons depending on your financial situation and goals:

a) Traditional Mortgage for a Second Property

You can apply for a mortgage on a vacation property just like you would for a primary home, provided it meets lender criteria. In most cases:

• A minimum 5%–10% down payment is required for a Type A property (fully accessible, year-round)
• A higher down payment may be required for seasonal or “Type B” cottages
• Mortgage default insurance may be necessary for down payments under 20%

b) Home Equity Line of Credit (HELOC)

If you’ve built up equity in your main home, you can tap into it to fund your vacation property purchase. A HELOC gives you flexible access to funds, often at competitive rates, without having to requalify for a new mortgage.

c) Mortgage Refinance

You can also refinance your current mortgage to access equity and use the funds for your second home. Keep in mind this resets your mortgage term and may come with fees or penalties if you break your current term early.

d) Private Lending

If your vacation property is remote, seasonal, or doesn’t meet traditional lending criteria, a private lender might offer a more flexible solution. However, expect higher interest rates and shorter loan terms.

Down Payment Rules and Insurance Considerations

Down payment rules vary depending on the type of property and how it will be used:

• For a Type A second home: As little as 5% down (with insurance) is possible
• For a Type B seasonal cottage: Typically 10%–20% down is required
• For rental or investment properties: Minimum 20% down and no mortgage insurance available

Mortgage insurance (from CMHC, Sagen, or Canada Guaranty) is only available for second homes that are:

• Owner-occupied
• Year-round accessible
• Under $1 million

Income and Debt Requirements: What Lenders Expect

Lenders need to see that you can comfortably manage two mortgages, or a mortgage plus a HELOC.

• Proving Income: If you’re salaried, show your T4s. Self-employed? Get ready with Notices of Assessment and maybe some extra paperwork.
• Total Debt Service (TDS) and Gross Debt Service (GDS) Ratios: Lenders use these to check how much debt you have compared to your income. Expect higher standards.
• Co-Applying: Consider teaming up with a family member, or see if you can use potential rental income to help you qualify. Just remember that some lenders may not fully count rental income.
• Required Documents: Gather everything you need – T4s, Notices of Assessment, proof of your down payment savings, and other financial records.

Additional Costs to Consider When Buying a Vacation Home

Don’t just think about the monthly payment! There are other costs to think about:

• Property Taxes and Utilities: Rural or remote areas can have surprisingly high costs.
• Seasonal Maintenance and Repair: Think snow removal or spring cleanup – it adds up!
• Property Management: If you’re renting it out, factor in management fees, especially for short-term rentals.
• Travel Costs: Don’t forget the cost of getting to and from your vacation property.
• Insurance: Seasonal or waterfront properties can cost more to insure.

Tips to Strengthen Your Application

Here’s how to give your application a boost:

• Reduce Overall Debt: Pay down credit cards and other debts before you apply.
• Boost Your Credit Score: A better score gets you better interest rates.
• Save for a Higher Down Payment: A bigger down payment lowers your monthly costs and improves your chances of approval.
• Get Pre-Approved: Know how much you can borrow before you start seriously looking.
• Work with a Mortgage Broker: Brokers can find options beyond the big banks, which might be perfect for your situation. Sandra Brown Mortgages is a great place to start!

Buying a vacation home can be exciting but complex, so do your research and get expert advice. How you finance it depends on what you plan to do with it, where it is, and your overall financial picture.

A good mortgage broker can guide you through the process, help you find the right lender, and explore creative solutions to make your dream a reality.