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Alternative Sources for Financing a Second Property

Alternative Sources for Financing a Second Property

Alternative Sources for Financing a Second Property

Photo by Scott Webb on Unsplash

Statistics on property ownership shows that more Canadians and Americans are purchasing a second property and finding alternative ways to finance a second home. The reasons as to why many people are purchasing their second property vary. Some of the common reasons include:

 

  • To become a landlord by renting out the second home,
  • To have a summer cottage or a winter chalet,
  • Purchase a second home for business stays or to be used by a university student studying away from their hometown.
  • To house elderly family members to ensure they are close to caregivers.

 

No matter the purpose, you will need to finance a second home with either a traditional mortgage or with alternative financing. So what are some of the alternatives to a traditional mortgage that you have to finance a second home? We will discuss the advantages and disadvantages of the different options to finance a second home.

 

Mortgage Refinancing

 

You can compare the different interest rates available for  mortgage refinancing and possibly take advantage of a lower rate. This cash can be used to purchase your second property and it is becoming one of the most preferred methods of financing a second home. One reason why mortgage refinancing has become the preferred way to get money for a second home is the ability to turn your current mortgage into a more affordable one through reduced competitive rates. Through refinancing, you may be able to get up to 80% of your home value financed less the outstanding amount of the current mortgage. Also, it may be easier to get a refinance on a primary residence over getting a mortgage on the second property itself.  One big downside is for rental properties as the interest on your primary residence is not tax deductible, so you miss out on this interest deduction.

 

When you want to refinance your mortgage, there are two options for you to consider. To begin with, you can break your mortgage contract early so as to qualify for lower rates. You have to look at the penalty amount and interest differential when doing this. The second option under mortgage refinancing is extending your current mortgage by topping it off. Check what the savings would be using either of the two options and settle on the most competitive one. A good mortgage broker or bank advisor can help you to do this calculation.

 

Own Your Second Home through Cash Purchase

 

If you have a disciplined savings plan, you can withdraw your savings and use them to purchase your second home. The National Association of Realtors’s survey for Vacation and Home Buyers in 2017 indicated that 36% of investors and 29% of vacation buyers paid cash for their property purchase; this statistic is not for primary residence purchases. However, this would include the properties purchased from the cash on a refinance of a primary home.

 

This survey shows the average vacation home is 1460 sq ft, investment property 1500 sq ft versus the average primary residence size of 1900 sq ft.  Investors were typically paying $155,000 for the investment property and vacation home buyers were typically spending $200,000 for a vacation home. The more affordable second property compared to a primary residence may also be a factor of why a larger portion are purchased with cash.

 

This may be the best financing method for a second home because of interest savings and no need to qualify for financing; however, you cannot ignore the opportunity cost of using your own cash. You may be better off purchasing more than one property by getting some financing and using the cash for downpayments. Also, if you are planning on renting the property then interest is tax deductible. If you have to save up for a longer period to be able to purchase with only cash, it could delay your purchase by years. This delay may cost you more in the long run if prices are appreciating in the area as well as the loss of rental income if you are planning to rent the home out.

 

Most people who use this approach will start saving for the second home way before identifying the property they intend to purchase. These are people with good enough cash flow to finance a second home. Therefore, if you already foresee a need for the second home in future, start saving early enough and factor things like inflation into your savings plan. This way, you will be able to finance your second home without paying interest and without having to qualify for a mortgage.

 

Take a Conventional Loan for the Second Property

 

This is ideal for purchasing a second home to serve as a vocational home or a business stay home. However, you have to be prepared to pay more in the form of interest rates and also to make the required down payments. This loan has strict guidelines and you will be required to have a higher credit score. The credit score is what keeps most borrowers away from using this approach. The banks will also check out your debt-income ratio so as to ensure you can afford the high-interest rates. This ratio is another factor that disqualifies many homeowners when applying for this loan; because, most of them have not yet cleared the debt on their first home.

 

Home Equity Line of Credit

 

The home equity loan is easily confused with the second mortgage when referring to sources of funding for a second home. Note that the home equity line of credit is similar to having a credit card. The credit limit when taking a home equity line of credit is equivalent to the value of your home. In most cases, lenders in Canada and the US have maintained it at 75% of the home’s value. When you take the home equity line of credit, you are able to pay it off any time you want and withdraw from it anytime during the period of the loan. When the loan term comes to an end, you are required to pay the whole amount that is outstanding. This option to finance a second home is ideal for borrowers who want to make a short time investment or use this loan before switching to one of the other financing options.

 

These are some of the ideas for financing your second property in Canada or the US. Renting out for short terms on Airbnb or with longer traditional leases will help to repay the loan faster and often make financial sense with vacation homes as well. Therefore, if you are looking for a long-term source of income or planning for your retirement, you can think of the different ways to finance your second property. This can be a good source of income when you are retired as well as a great way to build your wealth. Don’t forget that even if rental income is not generating much cash flow, it is still paying down your mortgage/loan.

 

Search by your city name or look on the map to find a REALTOR® that is educated, experienced, and tech-savvy to work with. If you don’t find someone just send an email to support@primoagents.com. We will connect you with someone that meets our strict criteria for being a top Real Estate agent.

Source:

“2017 Investment and Vacation Home Buyers.” Www.nar.realtor, www.nar.realtor/infographics/2017-investment-and-vacation-home-buyers.

1 thought on “Alternative Sources for Financing a Second Property”

  1. Buying a property is always a dream for all of us. Buying a second property is not a bad idea but we should always look for a new one. thank you for guiding us about the things we need to take care of while financing for second property. The concept of conventional loan is a good idea.

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