Second home or investment property: What’s the difference, and does it matter?
Generally, a second home refers to a real estate property that is owner-occupied, meaning the owner will be living in it at least part of the time. It can refer to a cottage, a vacation home or a weekday residence (like a condo) for someone who commutes far to work in a city. A multi-unit dwelling where the owner lives in one of the units and rents out the others is also considered an owner-occupied residence.
For mortgage lenders, it’s the “owner-occupied” part that matters. If your second or third property is non-owner-occupied (meaning you will not be living there at all), then it’s considered an “investment” property. And that means you’ll have to meet specific requirements to get a mortgage. Some smaller lenders don’t provide mortgages for investment properties.
What are the mortgage and down payment rules for buying a second home in Canada?
If you’re already a home owner in Canada, you’re likely familiar with many of the qualifying criteria, because many of the requirements for buying a second or third property you will live at are the same as for buying a principal residence. You will have to qualify for a mortgage under the stress test, have a good credit score (especially if you want to get the most competitive mortgage rates) and have a debt-to-income ratio that falls within the acceptable range for your lender. Read more about the mortgage rules when buying a second property in Canada.
The one major difference with buying a second property is the down payment—the amount of money you need to pay upfront in order to purchase the home. As with principal residences, the down payment needed on a second property is tied to the purchase price of the home. However, with second properties, the number of units on the property, and whether or not the owner will live there, impact the size of the down payment as well.
Can you afford a second home?
If you’re able to buy a second 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 and risk. It 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.
If you are offered a mortgage, the interest rate will be based on your profile, as well as current market interest rates and other factors. 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. Here’s how to know if you can afford to buy a second property.
Once you’ve moved into your new home, don’t forget that you might be able to claim certain expenses, like legal fees, 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 savings and investments, government programs or a financial gift from a family member for the down payment or more. In many cases, a combination of all three. Since mid-2023, first-time home buyers have also had access to the first home savings account (FHSA), a registered account designed to help first-time buyers save up for a down payment.
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