What does it take to buy a second home in Canada? There’s a lot to consider, from figuring out whether you can afford to buy a second property (and whether it’s worth it) to navigating the down payment requirements and mortgage rules. To help you get started, we’ve answered these questions and more.
- Second home or investment property: What’s the difference?
- The rules for buying a second home in Canada
- Affording a second home
- The best mortgage rates in Canada
- Financing your second home
- The best HELOC rates in Canada
- Is buying a second home worth the investment?
- The tax implications of buying a second home
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.
The role of home equity
Current property owners have another option—they can finance the purchase of additional real estate using the equity in the home they now live in. Essentially, the buyer borrows funds against the equity in their property, using the property itself as collateral. Read more about using equity to buy a second home.
Home owners’ equity options include:
- Mortgage refinance: This involves replacing your existing mortgage with a new and larger loan on different terms, either with your current lender or with a different one, to free up the equity in your home. If you break your current mortgage early, you’ll likely have to pay a mortgage prepayment penalty, and you will have to negotiate the terms of your new contract based on current market interest rates. Use a mortgage refinance calculator to understand the financial impact of refinancing a mortgage.
- Home equity line of credit (HELOC): You may be able to establish a revolving line of credit with a lender, for which your home equity serves as collateral. You can access up to 65% of your home’s value, and use the account as you would a secured credit card—borrowing money and paying it back as you need. Generally, HELOC interest rates are higher than mortgage rates. But, unlike with a mortgage, you don’t need to pay off the principal and interest on a fixed payment schedule. You can find the best HELOC rates available today using the tool below.
- Second mortgage: A second mortgage involves taking out an additional loan against a property for which you already have a mortgage. So, it’s not the same as having mortgages on two different properties at the same time. You will typically pay a higher interest rate on a second mortgage for the same property, because the loan is riskier for the lender.
- Reverse mortgage: HomeEquity Bank and Equitable Bank are the only two Canadian financial institutions to offer this niche mortgage product, which allows you to access up to 55% of your home’s equity. To get a reverse mortgage, you must be 55 or older. For this reason, it’s not common to finance the purchase of a second home with a reverse mortgage. A similar product is the home equity sharing aggreement, which just became available in 2024.
Each of the financial products and services above has its own qualifying criteria, pros and cons. But in each case, you will need to have more than 20% equity in your current property; lenders won’t let you borrow more than 80% of the value of your current home.
Qualifying as a first-time home buyer—again
In certain situations, you may qualify as a first-time home buyer a second time. So, even if you’ve previously made use of a first-time home buyer program, like the Home Buyers’ Plan or First-Time Home Buyers’ Incentive, don’t write off doing so again. Generally, to qualify for a program a second time, you must not have owned a home, nor occupied a home that your current spouse or common-law partner owned, within the last four years. However, each program has slightly different rules. Read more about how it’s possible to be considered a first-time home buyer twice.
Is buying a second home worth the investment?
There are a lot of potential answers packed into this relatively simple question. It depends on your life and retirement goals, the type of home you’re buying, whether you plan to rent it out, and how you’re financing the purchase—to say nothing of trying to anticipate changes in real estate prices and mortgage interest rates.
To confidently answer the question, you must first consider a number of financial and non-financial factors. And you may want to consult with a financial advisor, who can help you decide where buying another property fits within your financial plan. The following columns offer some perspective, whether you’re buying a vacation home or a rental property.
Read:
- Is a vacation home a good investment?
- Will you make money on your rental property?
- How to know if a secondary suite or basement apartment is legal—and a worthwhile investment
The tax implications of buying a second home
The tax implications of owning a single home that you live in are pretty straightforward. You’ll have to pay property taxes, but thanks to Canada’s principal residence exemption, you won’t owe capital gains tax at the time of selling the property.
That’s not the case if you own additional properties, such as a cottage, vacation home and/or rental property. Any property that is not considered your principal residence is subject to capital gains tax. This means that if the property appreciates in value between the time you buy and sell it, part of the gain will be added to your income for the year and taxed at your marginal tax rate (tax bracket). The capital gains inclusion rate is 50% of the capital gain. That will change on June 25, 2024, though, when the inclusion rate rises to 66.7%, as was announced in the 2024 federal budget. It’s good to be prepared and armed with good advice as the tax bill can easy climb into thousands of dollars.
There’s a lot to know about the tax implications of buying a second home in Canada. For example, certain capital expenses, such as replacing the roof on new a rental property, can increase the property’s adjusted cost base—and lower the amount of capital gains tax owed at the time of sale. And, if the expenses on your rental exceed what you make in rental income in a year, you may be able to claim a rental loss on your tax return. Check with a tax expert to be sure that applies to your situation.
The following columns and articles address many common questions about the tax implications of owning more than one property. Just remember to apply the new capital gains tax inclusion rate.
- How much is capital gains tax in Canada?—and other reader questions answered about the upcoming changes
- When does the “plus 1” rule apply to a principal residence?
- The tax implications for Canadians selling foreign real estate
- How to save on capital gains tax when selling a rental property
- How to calculate the adjusted cost base of inherited property
- Cutting down capital gains tax on real estate sales
- How is capital gains tax determined when a co-owned cottage is sold?
- Is there an exception for capital gains on the sale of a commercial property?
Before buying a second home
Purchasing another property can be an exciting and worthwhile investment. However, it’s not for everyone. It’s always good to speak to a mortgage broker or financial advisor before purchasing real estate, but it’s even more important when considering a second or third property. An experienced mortgage broker should be well versed in the financing conditions of different lenders and can guide you through the mortgage process. And a financial advisor can help you decide if buying another property is in your best financial interests.
Read more on buying a second home:
- Becoming your kid’s landlord could save thousands on the cost of university or college
- Using a TFSA to finance a rental property
- The best way to use your RRSP to invest in real estate
- Renting out a suite on Airbnb could endanger your mortgage
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