Thinking about owning a cottage at the lake, a condo on the ski hill/golf course or are your kids going to school in another city and you are thinking of buying a condo for them while they are in school? Then a second home may be for you!

So what is a second home?

By definition, a second home must be owner occupied or occupied by an immediate family member. Typically, a second home must meet all the requirements of your primary residence: It must have year-round access on reasonable public roads; a concrete foundation below the frost line; meet minimum square footage standards; have a kitchen; have a three-piece bathroom: have a common area; and contain a permanent heat source.

An immediate family member, by the lender or insurer’s definition, includes a person related to the borrower by marriage, common-law partnership, or any legal parent-child or sibling relationship.

Of the three mortgage default insurers (Genworth, Canada Guaranty and CMHC) CHMC is the only company currently not offering mortgage default insurance for second homes.

What does this mean to you? If you have less than a 20 per cent down payment, you still have options. There are two other insurers, Genworth and Canada Guaranty, that still have Second Home programs.

There are some restrictions on the number of mortgage default insured properties per borrower so it’s best to consult with your Mortgage Broker, like me, to find out more.

When it comes to income, rental income is not an allowable source of income for a second home. You can still charge your brother-in-law a fee when he uses the condo or your kid’s roommates, you just can’t use this income to help you qualify for the mortgage.

Vacation property or second home? What’s the difference?

Vacation properties and second homes are treated similarly by lenders because they are both to be used by the principal borrower and/or their immediate family on a rent-free basis. To the layman, a vacation property is for recreational use and can come in many forms: cottage, ski chalet, cabin etc.

To a lender or an insurer, a vacation home differs from a second home where year-round access may be limited. Vacation homes or seasonal properties may have a wood stove or fireplace as the main heat source. Seasonal use of the road is acceptable, meaning it does not need to be ploughed during the winter months. Boat only access is also allowed under a vacation property.

Property Limitations

When purchasing a second home or vacation property especially with less than 20 per cent down you’ll want to be aware of mixed-use properties, rental pooling and co-ops. Mortgage default insurers (CMHC, Genworth and Canada Guarantee) will not insure properties of these types.

A mixed-use property combines more than one type use of condo units. For example, the ground level of the complex may be used for retail, with residential condos above.

If you were to purchase a condo unit in an area such as Canmore, the condo corporation may run a rental pool. The borrower individually owns their unit but a board of directors or management company rents out the units and pools the rental income from all units and shares the expenses of all units. The owners also share any profit or loss from the rental pool.

Whether you choose to opt-in to the rental pool or not is irrelevant to the insurer, and even to some lenders, they still will not approve files with less than 20 per cent down.

A housing coop is very similar in nature.

What Kind of Down Payment is Required?

Down payment for a second home is the same as the purchase of any owner-occupied property – five per cent down payment on the first $500,000 value, and 10 per cent down payment on the amount over $500,000.

Down payments can come from what the insurers like to call “traditional down payment sources”: personal savings, RRSP withdrawal, non-repayable gift from immediate family member(s), existing home equity, and proceeds from sale of property.

If the property doesn’t fit the traditional property criteria (ie. access, seasonal property etc.) it is considered a Type B property. Type B properties require a minimum down payment of 10 per cent and must not be gifted.

A second home would be zoned as residential, rural or seasonal use. Quality roads maintained by the local municipality or a private service company with year-round access is a requirement for a second home. A permanent heat source such as a heat pump or forced air would also be in place.

As you can see there’s a lot to consider if you’re in the market for a second property. Whether it’s for your son or daughter to live in when they attend university, or that cottage on lake, give me a call and we’ll discuss your needs!

Co-written with the team from Your Mortgage Advantage – Susan Ashton, Martin Breeze, Brooke Juba, Garett Courtier and Jeff McGinn