These days, the epitome of the ‘Canadian dream’ of owning a residential property is slipping away from the grasp of middle-class Canadians, especially Torontonians. Buying one home for the average Torontonian became a distant reality, thanks to the rising prices.
The purchase of a second property is something that became popular for middle-class Canadians. This purchase is a decision that always needs careful and well-thought planning to determine if it is an option that is viable and worth even considering.
It is also a must to understand what purpose will the second property serves, is it a vacation home, an investment property or something for the kids?
Prospective buyers (including the seasoned ones) and residents should understand the various available options; be it re-financing, a home equity line of credit (HELOC), or a second mortgage. Let us now understand the process of purchasing a second property, in line with factors such as location, weather, amenities, etc. and how it could be the best investment move buyers make.
Why consider Toronto for investment and rental properties in the first place?
Despite the effects of the COVID-19, Toronto is still a flourishing city with a lively real estate market, making it a top target for the purchase of investment property. Factors for such are a stable market, strict and conservative lending guidelines, and a growing population courtesy of skilled immigration.
Keeping Toronto’s growing population in mind, there is still a large demand for rental properties (especially of Toronto lofts for rent), and this will climb upwards. When buyers invest correctly, they get to make good returns quickly by outpacing the market.
What are the things to consider when purchasing a cottage?
There are a lot of cottage communities in Ontario, giving buyers freedom of choice in obtaining a home away from home. When they search for a cottage community that is best for them, there are some different aspects worth considering:
· The difference from the community to major highways and expressways.
· How close are markets, restaurants, bars, grocery stores, services, and other amenities?
· Proximity to parks, trails, beaches, etc.
· Level of privacy, security, and seclusion.
· Is it accessible?
These factors impact the prices of both cottages and vacation homes. Hence, buyers should always do their homework before buying one.
Can Canadians afford a second property?
Let’s see now: in times when interest rates are at a record low in Canada; this seems like the perfect time to purchase a second property. There are some things which buyers should consider when buying a second property and they are mortgage payments on their existing home, car insurance, debt payments, cell phone plans, etc.
When these costs are evaluated and considered, people can then look at how they will do financially with additional mortgage payments and maintenance fees of a second property.
For instance, buyers looking at a second property priced at C$ 300,000 at 30% down and the bank is willing to loan C$ 260,000 at a rate of 10%; they are looking at an added cost of around C$ 2000 each month. Here are some financing options that can work for buyers:
Refinancing a home means that buyers are paying off an existing mortgage loan in exchange for a new home mortgage loan. This can help put money back in the buyers’ pockets in the long run, provided they find a new mortgage with improved terms or low-interest rates.
This can be quite beneficial when buyers are looking to purchase a second property, and this depends on their creditworthiness (i.e. how good their credit is). If their lender can guarantee them lower interest rates on their new mortgage, then this option becomes beneficial automatically.
How so? because the extra money that they can save can help them with a down payment on their second property or even pay the complete price outright, even if they are buying a Toronto Condo.
2. The prospect of a second mortgage
A second mortgage is also known as a ‘Home Equity Loan.’ For the lender, this is risky because they are in a second position on the title of properties. Some of the major factors’ lenders consider when checking to see if the buyer is qualifying for such an option are credit score, income, and equity.
The more equity a buyer has on their first property, the higher are their chances of qualifying for a second mortgage. Higher equity means less risk that any lender will take on.
Is annual income a considerable factor for this? Yes, it is because lenders can see how financially stable buyers are. A credit score is another factor considered by lenders.
Applying for a second mortgage is more viable than a home equity line of credit (HELOC) for those with a lower minimum equity percentage as well as a lower credit score as it helps them apply with either a trusted company or a private mortgage lender instead of a major bank.
For instance, when applying for a second mortgage with a trusted company, buyers need to have a minimum credit score and a minimum equity percentage of 10 – 15%.
3. A home equity line of credit (HELOC)
For those having a really good credit score and equity of more than 20% in their homes, applying for a home equity line of credit (aka HELOC) is the most affordable option they can obtain for purchase of a second property.
It is a revolving line of credit at quite a lower rate of interest than a traditional line of credit. In Canada, people can access 65% of their home’s value but their outstanding mortgage loan in addition to their HELOC should not equal more than 80% of their home’s value.
It is unlike refinancing because here, buyers do not need to break their existing mortgage or pay a penalty on the mortgage. All they need to pay is just a monthly interest-only payment. As identified by major sources, signing up for HELOC with any major Canadian bank has an interest rate of 2.50% needing a credit score between 650-900 and a minimum equity of 25%.
It does sound easy, but it is complicated. It would be wise for ‘would be’ buyers to always consult their lenders and bankers before delving in to buy a second property in both Toronto and the province of Ontario.