Five Things to Know to Finance A Vacation Home
Updated: Jun 15, 2021
Many of us are staying within the borders for the foreseeable future and many people I talk with are still looking for their getaway and considering buying a vacation home. After all, nothing is safer than spending time in our own backyard.
A vacation home can be an excellent investment and buying one in the mountains or at the lake isn’t impossible. The key to finding an affordable vacation home is planning your purchase and working with experts along the way. If you’re thinking about making the mountains or the lake your vacation destination, here are a few tips.
How do you plan to use your home?
Vacation, Secondary or Rental?
There is a difference between buying a vacation-only home, buying a secondary home, and buying a rental property.
Vacation and Secondary Home:
Zoned and used as residential, rural, or seasonal with central heating and year-round road access.
The property does not need to be winterized, no permanent heat source is required and seasonal road access is acceptable To get an idea of the vacation/secondary home versus the vacation-only home, think condo in Canmore versus the small cabin on the lake.
Renting Your Secondary or Vacation Home
“I’ll just rent it out when I’m not there.”
If only it were that simple.
Lenders and municipalities have their own separate requirements for short and long term rental properties.
If your plan is to buy a secondary home and rent it out, you need to let the lender know when you submit your credit application. Lenders treat owner-occupied secondary homes different from rental properties and it is considered mortgage fraud to mislead a lender on your intended use.
Most people wanting to buy a vacation property do not realize that anything that can be rented out nightly has complications and most mortgage lenders do not want to lend on commercial type properties. If you decide a short term rental works for your situation, research the community’s rules. Some communities, such as Canmore, control the location of short term rental with zoning. Other locations, like Penticton, control with municipal rules such as licensing and annual inspections to confirm units are up to code with fire, safety, and parking. Locations like Banff, do not allow second homes or short term vacation rentals.
Every scenario is different so make sure you have all the information first. Ask questions like, does your lender allow renting through the mortgage agreement or will it void your property insurance policy? All questions need answered before you sign the paperwork. Luckily, I’m here to help ask the right questions.
Required Down Payment
For a second home, you only need to put 5% down for properties less than $500,000. On properties valued between $500,000 and $1,000,000, a 5% down payment is required up to the $500,000, with an additional 10% on the portion of the home value above $500,000.
If you plan to rent your home, your down payment will change to a minimum of 20-35% depending on location and lender. Qualified home buyers may use traditional payment sources for their downpayment like savings, investments, non-repayable gifts, existing home equity, and property sale proceeds.
A condo might be the more affordable route, but they come with their own set of fees: condo fees. These fees can include things such as heat, water, and electricity to snow removal, but will vary by condo building.
If you do not use your condo regularly, fees that include snow removal can satisfy your insurance requirements since a snow-filled driveway/walkway is a sure sign of an empty property.
I know. Taxes are the last thing that you want to think about, but making a vacation home affordable also means looking at what you may have to pay in taxes each year.
There are three types of taxes to consider.
These are standard property taxes that are based on what your home’s value is assessed. The average 2019 tax amount in Canmore was approximately $2,000.
One-Time Property Transfer Tax:
Not all provinces have this tax, but popular vacation destinations such as British Columbia (B.C.) charge a one-time land transfer tax when you purchase or gain interest in a property. These taxes will vary based on the fair market value of the property.
If you’re an Albertan and want to own a property in B.C., you may be charged a speculation and vacancy tax, depending on the location of your vacation home. This tax was put in place by the B.C. government to create additional housing in locations where vacation and secondary homes are popular.
Your property taxes will be higher in B.C. as you will not be eligible for the homeowner grant.
Did you know that you can add house improvements to your mortgage on a secondary home?
The purchase plus improvements program is eligible for second homes. Need to add that second bathroom? No problem!
Should You Even Buy?
Of course! You can and should if you are prepared.
Financing a vacation home is not only achievable but also can be affordable with the right preparation and research. And before you start to think it’s out of your price range, there are many affordable homes in Canmore, Kootenays and the Okanagan.
There are plenty of options to consider when purchasing a vacation home, but the thing I stress with clients is to spend within your means. Without considering how you will be taxed, the costs may get out of hand down-the-road.
If you are looking into a vacation home, reach out to me! I am here to help you navigate your options to find YOU the affordable place to escape to, especially if you are looking within the beautiful Bow Valley area.