What to know when buying your second home

Preparing to buy a second home is an aspiration for many of us. For some, it’s to live out the dream of owning an urban getaway, summer cottage, or a winter chalet. For others, it’s the chance of securing extra monthly income.

Depending on whether your second home will be occupied by yourself or others impacts your financial options and insurance needs. Make sure you’re set on your plan before you commit. Here are some things to think about if you’re still on the fence:

Income Property

Pro:

Rental Income: It’s a no-brainer – one of the great perks about renting out your second home is having somebody else contribute towards your mortgage payments. Keep in mind that rental income is taxable, even if you’re using short-term rental services – though you can deduct certain expenses such as hydro, advertising and home insurance, to reduce your taxes payable.

Con:

A high down payment: Less than a decade ago, you could mortgage the full amount of the down payment. Unfortunately, nowadays if the purpose of your property is to rent it out for income, a down payment of at least 20% is required, according to the Canada Mortgage and Housing Corporation. With such a high down payment, it can simply be an unaffordable option without some serious savings.

Tip: If you’ve never been a landlord before, check our top 5 tips on being a first-time landlord.

Vacation Property

Pro:

A low down payment: Unlike rental properties, you’re not required to have a hefty down payment to secure your second home. In fact, your down payment can be as low as 5% (according to the Canada Mortgage and Housing Corporation). The same minimum rate as your primary home.

Con:

Cost effectiveness: It seems idyllic to have your own vacation home, but resist the urge to impulse buy. Consider these questions before you buy: Do you get enough time off from work? Is it in close proximity to your home? Will you be able to visit year-round? Think about how much time you’d realistically be able to spend there. This will help you determine if you’re going to get enough bang for your buck.

Tips for a bright investment

Whether you’re planning for ‘retreat’ or ‘revenue’, here's our top advice for you:

Determine your devotion

Before you decide on a location, consider if you can take on the responsibility of a second home, or if a condo (which includes building maintenance) would be better. It’s worth emphasizing that you’re responsible for minimizing the risk to your home – even when you’re not there or renting it out. For example, let’s say a cold snap occurred and you weren’t there to turn off the water supply. The pipes could freeze and burst, causing potentially catastrophic water damage. Not a nice thing to think about, but it demonstrates that damage could’ve been minimized had proper precautions been taken. Of course, there are pros and cons for home vs. condo that are outside the scope of maintenance, but it’s a huge thing to think about when choosing a second home.

Did you know? Insurance companies recognize there’s a higher chance that loss or damage can occur in second homes, simply because a lot of the time there’s no one there to spot the hazard. Take a look at our tips on how to protect your place when you’re not there.

Scope out the scene

Once you’ve found a spot, get to know what it’s like year-round. That doesn’t mean you have to wait a year before purchasing – visit the location off-season and speak with locals for their experienced take on the area. As you won’t be around all of the time, seek reassurance that it’s a safe place to own a second home. Check for signs of a favourable neighbourhood. Things like home improvements, places of worship and people out on the streets are great indicators of a strong community and a secure, invested neighbourhood.

Research the risks

Along with exploring the community, make sure you’re in the know of the geographical risks, too. Is the area prone to hail, flooding, earthquakes or forest fires? You’ll want to be certain your investment is properly protected if any of these apply. The good news is, a good insurance plan can cover all of these risks. Things such as earthquake coverage, sewer backup and overland water are additional coverages may be available to add on to a home policy, should you need it.

Manage your mortgage options

Mortgage rates are on the rise in Canada, but don’t let this put you off. There are quite a lot of options out there for financing second homes. Speak with a mortgage broker to help determine the best option for you. Even better, you might not need another mortgage if you can use the equity from your existing home.

Insure your investment

Your insurance needs will be different for your second home – location and its use are big factors in calculating coverage and premium. Also, it can be a little more expensive to insure a second home. For income properties, it’s the result of increased responsibility (e.g. injuries on your property). For vacation homes, there’s more chance of a loss when a place is uninhabited some of the time (e.g. undetected hazards). To save a bit of cash, consider bundling your policy with your current insurer as most offer multi policy discounts.

Work out what’s covered

If your property isn’t lived in for a period of time, certain coverage may be excluded (such as vandalism, glass breakage and water damage). Make sure you speak with your insurer so you know the ins and outs of how you’re covered. Your insurer must know if your place isn’t in use for a while, otherwise you could be denied any coverage – a scary thought. Become a pro on how to cover your latest investment with some great advice on how to insure your vacation spot or income property.

Protect your home and the things you love most.