Financing Available for Vacation and Second Homes and Cottages
Many financial institutions offer loans for the purchase of vacation and second homes, but the requirements and criteria are different. The down payment may be larger or the repayment term may be shorter, depending on the bank of choice.
The thought of having a second home or cottage is appealing - relaxing naps, long walks, spending time with family and friends, or changing the scenery. Obviously, the least painful option is to pay cash, if you have the money. But usually this is a lot of money. Still it is an option and a poll by NAR-Harris Interactive shows that some 32 percent of homebuyers paid cash when buying a vacation or second home. Another option is to use money in your savings or money market account to make a larger down payment. This is a good idea because it means a shorter repayment term and hence - less money in interest charges. If you don't have enough money in your savings account, you still have options. One is to sell real estate or another asset and another is to borrow against your home equity. Some 19 percent of all borrowers use their home equity when buying a second home.
Of course, the source of financing depends on the value of the property, the location, the credit and payment history of the borrower, whether collateral is offered, and other factors. Lenders in Ontario look at different factors such as a reliable source of income, including commissions, bonuses, overtime, part-time, second, and primary jobs. Some financial institutions also consider sources of financing such as investment and rental income, child support, alimony, disability payments, as well as veteran's and disability benefits. If you love skiing and live in Ontario it will make sense to buy a second home in Quebec or Alberta. You can take advantage of credit cards that offer travel rewards points.
Types of Financing, Criteria, and Terms
In general, homebuyers can choose from jumbo mortgages, variable and fixed rate mortgages, and other options. The problem is that second home mortgages are considered riskier on the part of financial institutions. If a borrower is unable to pay his bills, for example, he is likely to preserve his primary home and not vacation home or cottage. Thus, the risk of default is higher. Whatever the type of mortgage, the amount offered is usually lower than that for primary residences. The cap varies depending on the country, location, the borrower's loan to value ratio, and other factors. Financial institutions usually require a higher credit score than for primary residences. The biggest differences in the terms and conditions are based on the type of property and its characteristics. Some homes are more luxurious, spacious, and well maintained which makes it easier to resell them compared to rustic homes in isolated locations. They are more marketable, especially if the property can be used during the whole year. The situation is different when it comes to homes that offer seasonal or more limited use. Homes are divided into Type B and Type A properties. The latter can be classified as either vacation homes or primary residences while the former are considered seasonal and marketed as vacation homes only. For a Type A property, applicants can borrow up to 95 percent of its value. With Type B properties, the maximum limit is 90 percent. The amortization period is also different. It is usually 25 years for Type B properties and 35 years for Type A homes.