How to Buy a Second Home in Canada?

Purchasing a second property can be an exciting prospect for many Canadians, whether as an investment, future retirement home, or vacation getaway. However, buying a second home involves navigating various financial, legal and tax considerations. This guide examines everything you need to know before taking the plunge into second home ownership in Canada.

What is a Second Home in Canada?

In Canada, a second home refers to a property that the owner occupies part-time while still spending the majority of time at their primary residence. To qualify as a second home rather than a rental or investment property, the owner must personally use the property for at least 14 days per year, or 10% of the total days it is rented out (whichever is greater).

Common types of second homes in Canada include:

• Vacation properties like cottages or cabins
• Urban pied-à-terres used by commuters part-time
• Multi-unit dwellings where the owner occupies one unit
• Properties used by children attending school nearby

The key distinction is that a second home must be owner-occupied rather than solely generating rental income. As long as you use the property and meet occupancy requirements, a second home offers more flexible financing options than an investment property.

Top Reasons Canadians Buy Second Homes

There are 5 motivations for purchasing a second property, such as:

• Long-Term Investment

Real estate in Canada has historically provided strong returns, with home prices appreciating over time in many markets. As an investment, a second home can build equity that the owner can tap into later.

• Future Retirement Residence

Some purchase a second home as a future retirement residence in a desired location. This allows them to enjoy the property before making it their permanent home.

• Vacation Getaway

Second homes are commonly used as vacation properties to escape to on weekends or holidays. These can include cottages, cabins, and vacation condos.

• University Housing

Parents sometimes buy real estate for children attending university or college to live in. This can be cheaper than paying dorm rent.

• Rental Income

Second homes can generate rental income when not occupied by the owner. However, they must meet certain criteria to qualify as a second home rather than an investment property.

Are you qualified for a Second Home Mortgage in Canada?

To qualify for a mortgage on a second property, lenders will assess:

• Down payment – The upfront funds you can provide, usually at least 5-20% of the purchase price.
• Credit score – A minimum 680 score is typically required for the best rates.
• GDS and TDS ratios – Your debt-to-income levels must be within the threshold. Maximum TDS is usually 44%.
• Mortgage stress test – You must qualify at an interest rate 2% higher than the contract rate.

If specific criteria are met, lenders may allow 50% or more of projected rental income to supplement your qualifying income for a second home.

A mortgage broker can assist in reviewing qualifications and finding the best second-home mortgage rates.

Down Payment Requirements for a Second Home

The minimum down payment for a second home depends primarily on the purchase price. Effective December 15, 2024, the purchase price eligible for CMHC insurance will increase from $1 million to $1.5 million.

The new down payment requirements will be:

• 5% on the first $500,000
• 10% on portions between $500,000 – $1.5 million
• 20% minimum on amounts over $1.5 million

Down payments under 20% require mortgage default insurance from the Canada Mortgage Housing Corporation (CMHC).

A minimum 20% down payment is required for a rental property. Rental properties do not qualify for CMHC insurance.

How to Finance and Afford a Second Home?

Below are the top ways to finance the down payment and closing costs:

Down Payment Savings

One strategy is gradually saving and investing funds specifically for your real estate goal. High-interest savings accounts provide secure returns for down payment savings. Tax-advantaged accounts like TFSAs can also build savings while sheltering investment gains that can be used for the purchase.

Utilize your home equity

Another option is to utilize home equity through refinancing or taking out a HELOC against your current home’s value. You must have at least 20% equity in the home to qualify, and can typically borrow up to 80% of the value less the mortgage balance. Refinancing withdraws a lump sum, while a HELOC allows multiple withdrawals if you don’t need the funds immediately.

First-time home buyer programs

First-time home buyer programs like the Home Buyer’s Plan could potentially be tapped again in some cases by first-time buyers to withdraw RRSP funds interest-free if used previously. If the funds are paid back into the RRSPs within the deadline, these programs may be utilized again for a second property purchase.

However, withdrawing RRSP funds directly to purchase a property should be avoided, as it triggers significant tax penalties. Homebuyers should leverage the Home Buyer’s Plan.

Second Home Mortgage/ Private Mortgage

Seeking a private mortgage from a non-institutional lender is another avenue, though interest rates and fees are usually higher. Private mortgages provide greater flexibility in qualifying with lower down payments and credit requirements.

Family Assistance

Gifts or loans from family members can also assist with covering the down payment. Any gift funds must be documented with a gift letter to confirm you are not expected to repay the amount.

When assessing affordability, be sure your TDS and GDS ratios remain within approved limits after factoring in the carrying costs of a second home.

Tax Implications of Owning a Second Property

Unlike a primary residence, second properties do not qualify for the Principal Residence Exemption in Canada. As a result, you may face capital gains tax when selling a secondary property that has risen in value.

Current capital gains inclusion rates on second properties are:

• 50% of gains under $250,000
• 66.7% of gains over $250,000

Other tax considerations:

• Rental income is taxable, but expenses can be deducted.
• The “one-plus” rule provides flexibility to assign principal residence in limited cases.
• Foreign second properties may have separate tax implications.

Consult a tax professional to maximize deductions and minimize capital gains when selling.

Is Buying a Second Home a Good Investment?

The financial return on a second home depends on factors like:

• Property appreciation – Real estate must appreciate at a rate above expenses.
• Rental income – Project and achieve suitable occupancy rates and rental yields.
• Expenses – Account for mortgage interest, taxes, maintenance and repairs.
• Tax deductions – Principal residence exemptions and valid expense deductions can improve returns.

Leveraging home equity can give second property ownership a head start compared to traditional investments. However, real estate also has liquidity and risk trade-offs to consider.

What to Consider When Buying a Second Home?

Assess the following before purchasing a second property:

Financial Situation

• Do you have savings and income to cover the mortgage, taxes, and maintenance?
• What down payment can you provide without tapping retirement savings?

Time Commitment

• Can you commit to regular upkeep and maintenance?
• If remote, can you afford maintenance services?

Income Stability

• Is your income from employment or business secure?
• Can you handle carrying two properties if income disrupts?

Time Horizon

• How long do you plan to own the property? Could you cover costs for years if needed?

Can You Have Multiple Primary Residences?

Only one property per year can be designated as an individual’s principal residence for tax purposes in Canada. This means that even if you own multiple homes, you must choose which property to assign as your primary residence each tax year.

The “one-plus” rule provides some flexibility in limited cases:

• If you sell your current principal residence and buy a new one in the same year, both can qualify under the one-plus rule.
• Certain life events, such as marriage, separation, or the death of a spouse, also allow the one-plus rule to apply.
• Inheriting a secondary property may also permit the principal residence exemption on two properties in a year.

But in general, you can only designate one property per tax year as your principal residence to receive full tax exemptions.

How To Buy A Second Home As A Primary Residence?

If you wish to designate your second property purchase as your new primary residence, you must:

• Inhabit the new home for at least 6 months of the year.
• Formally designate it as your principal residence for tax purposes.
• File taxes consistently, with the second property being your new permanent address.
• Spend most of your time living in the new residence.
• Maintain the home as your legal permanent address for documents like your driver’s license, vehicle registration, etc.
• Report your previous residence as a rental property if renting it out, paying applicable taxes.

The mortgage qualification rules are the same for a second home declared as your new principal residence. However, consider the tax implications if converting your original house into a rental property when moving.

How to convert First Home into Rental Property?

When turning your original house into a rental upon buying a second property, note that:

• The first home must be reported as a rental on your tax return.
• Rental income is taxed, but rental expenses can be deducted.
• The property will no longer qualify as your principal residence once rented.
• You cannot claim the Principal Residence Exemption for years it is a rental.
• The property’s deemed disposition or sale price becomes the new cost basis for capital gains calculations.

To qualify your second home as a principal residence, you must inhabit the new property for at least 6 months annually and formally designate it as your primary residence for tax purposes.

Step-by-Step Guide to Buying a Second Home

Follow these 9 steps when purchasing a second home:

1. Assess finances – Review income, debts and savings to understand your financial position.
2. Determine property type – Decide based on intended use, e.g. cottage, rental income, etc.
3. Save for down payment – Gradually build down payment funds in savings or a preferred investment account.
4. Get pre-approved – Talk to a mortgage broker and get pre-approved so you know your price range.
5. Find suitable property – Research listings and neighbourhood options that match your criteria.
6. Make an offer and purchase – Submit an offer, negotiate purchase terms, and close on a new home.
7. Understand tax implications – Connect with a tax professional to plan for capital gains tax exposure.
8. Maximize deductions – Claim applicable deductions like maintenance costs and property taxes.
9. Enjoy your new home! – Furnish and decorate your new property and make plans to enjoy it!

Key Takeaways – Buying a Second Home in Canada

• A second home must be owner-occupied to receive flexible mortgage financing. Pure rental properties have different rules.
• Minimum down payments start at 5% of the purchase price but increase with higher-priced properties.
• Qualifying for a second home mortgage involves assessing your income, debts, credit and down payment.
• When selling, expect to pay capital gains tax on appreciation since the Principal Residence Exemption only applies to one property annually.
• Work with financial professionals like mortgage brokers and accountants to navigate the second home-buying process.

Buying a recreational, vacation, or future retirement property can be an exciting goal. While second homes involve unique financial considerations, they can also provide enjoyment and financial gains if approached strategically.

FAQs

Article Sources

1. Buying a Second Home in Canada: How it Works
2. Buying a second home: How it works in Canada