Financing Vacation Properties in North America
by Shawn Selanders, Broker
Dominion Lending Centres
www.ShawnSelanders.ca
Financing for Vacation Properties
Although fixed mortgage rates have started to creep up in recent weeks, interest rates and property prices remain on the low side, making now an ideal time to purchase that vacation home you’ve always dreamed about.
Whether you’re planning to buy a waterfront retreat or a country getaway, a seasonal or year-round property, your mortgage professional can help walk you through the steps to acquiring financing for your second home.
Depending on the specifics of the property you buy, you may be eligible to obtain financing for up to 95% of its value.
Tapping into your home equity
Your primary residence is another great option for financing your vacation property. If you have built up equity in your home, you can often use those resources to purchase your vacation property through a refinance or a home equity line of credit (HELOC).
Depending on your current mortgage lender, you may be eligible for a HELOC product that would allow you to withdraw some equity from your current residence to help finance your second home. Your mortgage professional will be able to weigh your options with you.
One benefit of using a HELOC to help finance your vacation home is that there is little or no set-up fee involved and you only pay interest on the portion of the HELOC that you use.
Whether refinancing your current mortgage, you may even be able to save extra money by switching to a lower interest rate – money you can put towards maintenance, renovations or property taxes on your vacation home.
If you choose to refinance, keep in mind that there are penalties for paying out your existing mortgage loan prior to renewal, but these may be offset by the extra money you could acquire to put towards your vacation property.
Also keep in mind that by refinancing you may extend the time it will take to pay off your mortgage. That said, there are many ways to pay down your mortgage sooner to save you thousands of dollars. Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.
You can also change the way you make your payments by opting for accelerated bi-weekly mortgage payments. Not to be confused with semi-monthly mortgage payments (24 payments per year), accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the term of your mortgage.
If, for instance, you have a $100,000 mortgage, an interest rate of 5% and an amortization period of 25 years, your monthly mortgage payment would be $581.60 and your total payments for a year would be $6,979.20 ($581.60 x 12).
To understand the savings accelerated bi-weekly mortgage payments can make, take the monthly mortgage payment of $581.60 and divide it by two ($581.60 ÷ 2 = $290.80). Next, take that payment and multiple it by 26 to arrive at your total payments for the year ($290.80 x 26 = $7,560.80).
As you can see, by using the monthly mortgage payment plan, you’ve made payments totalling $6,979.20 for the year, while using the accelerated bi-weekly mortgage plan you’ve made payments totalling $7,560.80 – a difference of $581.60.
Basically, with accelerated bi-weekly mortgage payments, you’re making one additional monthly payment per year.
Using this example, you would reduce the amortization on your $100,000 mortgage from 25 years to just over 21 years and your total savings on interest over the life of the mortgage would be just over $12,000.
Buying in the US
With property prices continuing to fall in the US, many Canadians have chosen to purchase vacation homes south of the border.
Your mortgage professional can also help you navigate through the US home-buying process, as most Canadian mortgage professionals have a trustworthy US counterpart to handle these deals.
When using the services of a US mortgage professional, clients typically acquire their mortgages through a US bank in US funds.
It is possible, however, for Canadians to use the equity in their primary residence to finance a vacation home in the US.
Many Canadian banks have made it possible for Canadian consumers to acquire mortgages through their US affiliates. The downside to using Canadian banks in the US is that many of their US affiliates are limited to specific areas and often don’t lend in your desired location.
And while there was a time when Canadians could put down 20% on a US property, today lenders favour purchasers who have between a 35% and 50% down payment.
US lenders have also become more stringent regarding the documentation they require from Canadian homebuyers. For a complete list of the documentation you’ll need should you choose to purchase in the US or abroad, check with your mortgage professional.
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