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All the key tips to buying, using, and even renting out a vacation home.


So, you are looking to purchase a second property! Congratulations! This is an incredible opportunity and we are here to help provide you with the keys to success to expand your financial portfolio and ensure stability for the future.

Before you launch into this purchase there are a few things you should know, depending on which type of second property you are looking to purchase.


Purchasing a Second Property

When it comes to considering additional investments, most people don’t look at secondary properties. Why? Generally, people are trained to stay out of debt. As a result, they don’t tend to consider using the equity in their home to buy an investment property, but it all comes down to the art of leveraging.

In the case of purchasing a secondary property, most lenders will allow you to borrow money against the equity you have in your current home and use it as a down payment for a second home. Before jumping in, it is important to understand the different financing options to determine which route best suits your circumstances and property goals.

 

Refinancing Your Home

One option for tapping into your home equity for the purpose of purchasing a secondary property is to refinance your mortgage. Essentially, mortgage refinancing means getting a reevaluation on your home and then redoing your mortgage based on the current value. This will allow you to tap into the equity your home has built over the years, and pull out the extra funds for a down payment on your secondary property. 

Keep in mind, when using some of your current equity, it will increase the principal amount and the interest payments on your mortgage as the mortgage is now refinanced at a higher amount.


Using a HELOC

There is a second option to unlock your home equity, which is through a line of credit or a HELOC, which stands for “Home Equity Line of Credit”. This option allows you to borrow money using the equity in your property, with the property as collateral.

A HELOC serves as a revolving line of credit to allow the borrower to access funds, as needed, letting you utilize as much (or as little) equity as required. Another benefit to this is that you will only pay interest on the amount you actually use. This can provide financial breathing room, especially during tight months. That said, if you do choose to pay the interest as well as a portion towards the principle, it can help you pay off the loan much faster.

You can utilize a HELOC in two ways:

1)    You can tie it to your existing mortgage

2)    You can apply for a HELOC separate from your mortgage

In Canada, you are able to borrow up to 65% of your home’s value using this method. However, keep in mind, your HELOC balance AND current outstanding mortgage cannot exceed 80% of your home’s value when added together.


Types of Secondary Properties

When it comes to secondary properties, there are multiple uses for them such as purchasing a vacation home, or using a second property for the intention of earning rental income. Depending on which purpose you are considering, there are different requirements to keep in mind.


Vacation Properties

Whenever people hear “vacation property”, you automatically assume these are only for the super-rich but that is simply not true! Vacation properties can be possible for anyone and are a great option for those who want to get away from it all!

If you're inclined to head down that road, buying a vacation property is essentially like purchasing a second home. The minimum down payment remains 5% of the purchase price and will require the same processes as your first mortgage. If you are purchasing a non-winterized vacation home, or will not have year-round access, then you will be required to put down 10%.

It is also important to note that if you plan to use your vacation home to provide rental income as this will have different requirements as noted below.


Second Property with Intention to Rent

If you are purchasing a secondary property - whether a vacation home or investment property - there are a few differences if the intention is to rent.

Before you look at purchasing a rental property, there are a few things to consider:

  1. The minimum down payment required is 20% of the purchase price, and the funds must come from your own savings; you cannot use a gift from someone else.

  2. Only a portion of the rental income can be used for the qualifying and determining how much of a mortgage you can afford to borrow. Some lenders will only allow you to use 50% of the income added to yours, while other lenders may allow up to 80% of the rental income while subtracting your expenses. This can have a much higher impact on how much you can afford.

  3. Interest rates usually have a premium on them when the mortgage is for a rental property versus a mortgage for a home someone intends on living in. The premium can be anywhere from 0.10% to 0.20% on a regular 5-year fixed rate.

Rental income from the property can be used to debt service the mortgage application, but do bear in mind that some lenders will have a minimum liquid net worth requirement outside of the property. Also, if you do eventually want to sell this property, do note that it will be subject to capital gains tax. Your accountant will be able to help you with that aspect if you do decide to sell in the future.


Who Can Qualify?

You might be surprised to learn that you don't need to be one of the uber rich or make six figures to have a second property. You just need to have knowledge, determination and financial planning.

When it comes to purchasing a secondary property, whether for investment or rental or vacation, it can be a great opportunity! Before taking on a secondary property, you will need to have your down payment in order (whether from savings or home equity) based on the minimum requirements, and also have sufficient credit score to qualify (680 or higher).

In addition to the down payment, you will also need to pass the stress-test and prove that you can financially carry both mortgages. Also keep in mind any barriers with lenders as most will limit the number of mortgages in a portfolio. If this is only property number two or three, you won't have any concerns, but as you expand your portfolio you may run into limits at five properties (at which point you would be considered a commercial file).

Before you jump into the purchase of a secondary property, consult with a Dominion Lending Centres mortgage professional. They can help review your financial situation, current mortgage and equity, and help you make a plan. The keys to success are right around the corner with a little bit of expert advice!


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Help your property put its best foot (or room) forward.


When selling a home, presentation is everything. Successfully staging a property can help buyers visualize themselves living in your home, which ultimately can lead to more offers. 

While staging your home for photos has always been important, sellers now have to pay even more attention to their home’s “screen appeal” to get noticed. Since there are fewer in-person viewings and even fewer open houses than ever before, paying attention to how your home appears on desktops and mobile devices is critical. Buyers are relying on virtual home tours and virtual neighbourhood tours to browse properties, and sellers are adjusting strategies accordingly. 

By focusing on how your home looks in photos, videos, and online in general, you can give yourself the best possible chance to sell your home in today’s increasingly virtual market. Here are a few tips on upping your home’s screen appeal as you get your listing ready. 



Move or hide “accessories” (in other words, declutter)

Before taking any photos or videos, make sure you’re putting your home’s best features forward while also minimizing distractions. Do a sweep of the space and see what small items can be tucked away. This includes small kitchen appliances such as coffee-makers or blenders, remote controls, toys, toothbrushes, lawn ornaments, garbage and recycling bins, shampoo bottles, and so on. You should also remove fridge magnets, and overly personal photos and mementos. By removing clutter (even if it’s not clutter to you), you’ll make your home feel more open, and it will help allow prospective buyers to visualize themselves in the space. 


Play around with lighting

Indoor lighting translates very differently on a screen versus in person. So, first things first: take a lot of test photos and videos to see what’s working and where. Natural light looks much better on screen than artificial light. The time of day when your space will photograph best will depend on which directions your windows face. You want to find a balance so that natural light fills the space without casting harsh shadows or glares. Try raising blinds and opening doors to get the most amount of light in. Or, try putting up thin, white curtains to help diffuse the light if needed.

Next, layer lights and lamps at various heights to fill up the room. Test different combinations of overhead lights, standing fixtures and table lamps to find the best amount of coverage. No matter what, ensure the temperature (cool or warm) and type (LED, fluorescent, etc.) are consistent in the room you’re photographing. 


Use vertical space

Walls aren’t just for photos and artwork. When staging for a virtual home tour, keep in mind that choosing abstract art is a great way to add sophistication and style, and match many people’s tastes. Beyond that, using vertical space to get items off of the floor can help make a room feel larger, more open and less cluttered when viewed on a screen. 

Use shelves instead of floor-standing furniture whenever possible: hang a floating shelf beside your bed instead of a side table or line up a column of shelves in place of a large bookcase. Take your lighting off the floor, as well, and use wall sconces, table lamps and pendant lights instead of relying only on floor lamps. Check out this blog post on design tips to make a small space feel bigger for more ideas on the best ways to use vertical space. 



Organize pantries with glass containers

This trend was pulled straight from Pinterest and echoed by the always-organized Marie Kondo. By decanting all of your pantry staples into clear, glass jars, you’ll remove the distractions and cluttered-feel cause by labels and packaging. Since storage is often a key feature home buyers look for, this tactic will make your pantries a focal point of an image, instead of an eyesore. 

This method also works with bath and cleaning products. You can instantly glamourize your tub area by replacing plastic soap and shampoo packaging with antique-looking glass jars (that you can buy for cheap at a dollar or thrift store).


Add greenery

Plants are one of the biggest interior decorating trends flooding Instagram today, which can be attributed to the fact that they really pop in photos. A few well-positioned plants add brightness and life to a space and to an image. Adding a variety of sizes and species brings personality to a room. If you want to jump on this trend to enhance your home’s screen appeal, but don’t think you can keep a real plant alive, there are many artificial plants you can find today that will look real in a photo or video, but won’t require your ongoing attention once the virtual tour wraps. While introducing greenery definitely helps with screen appeal, be careful to not overwhelm a space. The “jungle aesthetic” isn’t for everyone. 


Artfully curate your shelves

To keep things visually interesting and make your bookcase screen-ready, there are a few steps you can take. First, don’t simply line books up library-style. Have some lined up vertically, others stacked horizontally. Then, fill up extra space with small plants, candles, keepsakes, artwork and photos (without making them feel cluttered or too personal). Finally, make sure the lighting around your bookcase is appropriate. Add some battery-powered lights to the shelves, surround it with sconces, or place a floor lamp nearby. 


Revert rooms to their intended use

If you’ve really customized how you use your space, you’ll want to consider that potential home buyers may not have the same needs as you. For example, many people have set up home offices in their dining rooms. Your potential buyers might want to prioritize an eating space over a working space, so seeing this change might be off-putting. Instead, show off the rooms of your home in the way they were intended to be used. Before starting your virtual tour, tuck away your computer and make the dining area meal-friendly again. If you’re using a patio as storage, tidy it up and make it part of the living space. You can always revert back to the way you use the space after your home tour is done, but this way your potential buyer can see themselves in the space, too. 

Getting your home screen-ready before a photoshoot or virtual tour can be similar to how professional stagers would set up before an in-person open house, with a few exceptions. By paying special attention to lighting, storage, décor, and how a space is used, you’ll create a photo and video-friendly space that will help attract buyers in today’s increasingly virtual real estate market. 

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The Canadian Mortgage and Housing Corporation (CMHC) has implemented new underwriting criteria (eligibility requirements) to apply for homeowner transactional and portfolio mortgage insurance. Introduced earlier this summer, these new adjustments from CMHC come as a precaution while the COVID-19 pandemic continues to impact consumers in the real estate market and many other aspects of day-to-day life.


The following changes have been made:

  • The maximum Gross Debt Service (GDS) ratio is now 35% with no exceptions (previously, 39% GDS ratios could be approved under special circumstances).
  • The maximum Total Debt Service (TDS) ratio is now 42% with no exceptions (previously, 44% TDS ratios could be approved under special circumstances).
  • The minimum credit score required for at least one borrower is now 680 (previously 600).
  • Non-traditional sources for down payments that increase indebtedness will no longer be treated as equity for insurance purposes.

However, not all Canadian mortgage insurers have followed suit. Canada’s other two mortgage insurers, Genworth Canada and Canada Guaranty, announced earlier this summer they would not be following CMHC’s lead.


In a statement at the time, Genworth confirmed, “it has no plans to change its underwriting policy related to debt service ratio limits, minimum credit score and down payment requirements.”

Canada Guaranty echoed this sentiment saying it “confirms that no changes to underwriting policy are contemplated as a result of recent industry announcements.”


How is mortgage insurance affected?

Mortgage insurance protects lenders in the event homeowners default on their mortgage. Home buyers purchasing a home with a down payment of less than 20% must have mortgage insurance. The following underwriting criteria are the main figures taken into consideration for mortgage insurance applications:

  • GDS ratio: GDS ratio is the percentage of a buyer’s gross monthly income used for mortgage payments, taxes and heating costs and—if they are buying a condo—half of the monthly maintenance fees. 
  • TDS ratio: TDS ratio is the percentage of gross monthly income required to cover monthly housing costs, plus all of a buyer’s other debt payments, such as car loans or leases, credit card payments, and lines of credit payments. A TDS calculator is available here.
  • Credit score: credit score ranges from 300 to 900 and is determined from a person’s credit report. A higher number means a person’s credit is managed responsibly. Various factors are taken into consideration to calculate credit scores. TransUnion and Equifax are Canada’s two main credit bureaus. You may also find your credit score through a private provider or your financial institution.
 

How does this all affect me?

While CMHC has made these slightly stricter underwriting restrictions as a precaution for the economic impact COVID-19 has had on the housing market, current trends are showing a promising rebound. Canadian home sales and prices have trended upwards through May, June and July following an initial decline in March and April, although on a year-to-date basis we remain below 2019 figures.


The Canadian housing market will see the financial and economic impact of COVID-19 unfold for months to come, and each province and territory’s recovery plan varies.

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Moe Pourtaghi


"Nothing brings me more joy than seeing my buyers & sellers have success in their Real Estate endeavours. I hope you find the articles on my blog inspiring and educating in your ventures." - Moe Pourtaghi

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