Understanding the different options available be it refinancing, a second mortgage or a home equity line of credit (HELOC) is a crucial first step. This article will break down that process for you. Buying a second property can also be an amazing investment as long as you take into consideration different factors like location and other critical components.
Rental & Investment Properties – Why Toronto?
Although COVID-19 has had an effect on the real estate market, Toronto is still a flourishing city to purchase an investment property in as we have a very stable market, strict and conservative lending guidelines, and a growing population thanks to skilled immigration. With Toronto’s growing population there is still a huge demand for rental properties with numbers expected to climb. When you invest correctly, you can make better returns faster by outpacing the market. Some of my real estate investors have already earned between 10% and 25% on their 2018 investments. Have a look at some of my client returns here. It is important to consider condos with the best margins and they can be found in both the re-sale market and the pre-construction market.
Cottage or Vacation – Things to Consider
There are many cottage communities in Ontario that you can choose from as your home-away-from-home. When you are searching for a cottage community that is right for you there are different aspects of the location to consider such as:
-Distance to major highways
-Proximity to grocery stores, services and bars/restaurants
-Proximity to beaches, trails, parks
-Seclusion & privacy
-Accessibility (car or boat)
These factors will impact the price of your cottage or vacation home so doing your research before making a decision is a must.
Refer to this article for Fivewall’s top 10 communities to buy a cottage in Ontario
Can you afford a second property?
At a time when interest rates in Canada are at a record low, it is the perfect time to buy a second property. Some things you will want to consider when buying a second property are mortgage payments on your current home, debt payments, car insurance, cell phone plans, etc. If these costs are evaluated and considered, you can then look at how you will sit financially with the added mortgage payment and maintenance fees of a second property. For example, if you are looking at a second property that costs about $200,000 at 20% down and the bank is willing to loan you $160,000 at a 5% interest rate, you are looking at an added cost of about $1,000/ per month. Let’s take a look at a few different financing options that may work for you.
Refinancing your home means that you are paying off an existing mortgage loan in exchange for a new home mortgage loan. Refinancing can put money back in your pockets in the long run if you find a new mortgage with better terms or lower interest rates. This can be extremely beneficial when you are looking to buy a second property depending on your creditworthiness. If your lender can guarantee lower interest rates on your new mortgage, this option is automatically financially beneficial because the extra money that you save could help with a down payment on your second property or even pay it off outright.
A second mortgage
A second mortgage is also known as a home equity loan. For the lender, this is riskier because they are in a second position on your properties title. Some of the major factors that your lender will consider when checking to see if you are qualified for this option are equity, income, credit score. The more equity you have available on your first property, the higher the chances of qualifying for a second mortgage will be. Higher equity means less risk that a lender will take on. Annual income is a large factor that your lender will consider because it shows how financially stable you are. Credit score is also another factor that is considered by the lender. Applying for a second mortgage is more viable than a home equity line of credit (HELOC) for those with a lower minimum equity percentage and a lower credit score because you can apply with a trust company or a private mortgage lender rather than a major bank. For example, when applying for a second mortgage with a trust company such as ‘Home Trust’ you must have a minimum credit score of 550-700 and a minimum equity percentage of 10-15%.
Home Equity Line of Credit (HELOC)
For those who have good credit score and more than 20% equity in their homes, applying for a home equity line of credit (HELOC) is the most affordable option for buying a second property. This is a revolving line of credit at a much lower interest rate than a traditional line of credit. In Canada you are able to access 65% of your home’s value but your outstanding mortgage loan + your HELOC must not equal more than 80% of your home’s value. Unlike refinancing, you do not need to break your existing mortgage or pay a mortgage penalty, just a monthly interest only payment. According to ratehub.ca, signing up for HELOC with a major bank such as TD has an interest rate of 2.50%, your credit score must be between 650-900 and you must have a minimum equity of 25%.
Check with your current mortgage provider to see which of these options work best for you.
We Can Help
Buying a second property is a very large investment so having an analytical professional that knows the type of property you want to buy is very beneficial. Book a call today to begin the process of buying your second home.