Tips for Buying a Second Home

Everyone knows you can never have too much of a good thing. That concept is even more true when it comes to owning real estate. If there’s something magical about “home,” having more than one just amplifies the benefits even more. From an emotional standpoint, buying a second home, or having multiple properties offers a sense of security like nothing else. You rest assured in the knowledge that you and your loved ones always have a safe space in the world.

Financially speaking, few things offer as much investment potential like owning a property or two. It’s a path worth exploring if you have the capital and borrowing power to make it happen.

Today, we’ll talk all about why and how to buy a house before selling yours in Canada. Or, in some cases, tips for buying a second home without ever selling your existing property at all.

Planning a home purchase in Peterborough or the Kawarthas? Start by downloading our comprehensive Relocation Guide.

Using Equity to Buy a Second Home

The first step to buying a second home and expanding your real estate portfolio is to understand the financing process. Few of us have the funds to buy a property outright.

Even if you did, it doesn’t usually make sense to tie up your cash flow. Knowing how to get a second mortgage to buy another house can open up a lot of doors for the future, literally!

Let’s start with a quick crash course in equity. Your equity is defined simply as the value of your assets minus your liabilities. For example, imagine you bought a house or condo five years ago. To keep the math simple, let’s say you paid $500,000 for the property.

In this illustration, we’ll also assume that you made a 20% down payment of $100,000 and an amortization period of 25 years. (Note: a 20% down payment wouldn’t be necessary on a $500,000 home. At this price point, you could make your purchase with as little as 5%, but that’s a whole different topic).

A portion of each mortgage payment goes to interest. The rest is applied to your principal, gradually paying down the loan and adding to your equity. At an average interest rate of 5%, you would have reduced your mortgage amount by approximately $45,000. Add that amount to your original down payment, and your equity in your home has increased to $145,000.

Ready to begin the hunt to buy a second home? Our featured listings page might have exactly what you’re looking for.

An Increase in Purchasing and Borrowing Power

Your mortgage payments only add a small amount to your equity. Many people like to compare it to a “forced savings account,” where some of the money comes back to you when it’s time to sell your home.

However, the real equity growth comes as your property appreciates in value. Presuming a rate of 10%, your $500,000 home is now worth about $800,000, for an increase of $300,000.

Between your mortgage payments and appreciation value, your total equity in your home five years later is $345,000. This is why real estate remains a valuable investment vehicle, fluctuations and all. An extra $300,000+ in your net worth creates a significant amount of purchasing power, which you can use to buy a second property in Canada.

Why buy a home in Peterborough? The benefits keep piling up, as you’ll see in the posts below:

Second Home Mortgage Rules Canada

With sufficient equity in your property, you can potentially qualify for either a Home Equity Loan (HEL) or a Home Equity Line of Credit (HELOC).Both are called a “second” mortgage because if you default on the loan, the first mortgage lender would take priority. The lender is taking on a higher level of risk, which often translates into higher interest rates.

The rules for a second mortgage in Canada state that your second mortgage typically cannot exceed 80% of the appraised value of your first property. Let’s take another look at the example of your $500,000 home that grew in value to $800,000.

The total amount you could borrow against this property is 80% of the current value, which works out to $640,000. Now, subtract the amount remaining on your first mortgage.

With $100,000 down payment and $45,000 paid down on the principal, you still owe $355,000. Based on this calculation, you could borrow as much as $285,000 to cover the down payment on your second property. With this in mind, let’s take a look at some of the options that are now open to you.

Buying a House Before Selling

If you’re ready to move on, one of your first decisions is whether to buy first or sell first. Both have advantages and disadvantages depending on the market.

Buying a house before selling allows you to keep your first property for the time being. That way, you can shop for a new home on your time and on your own terms. After you move, you can decide if and when to sell your original home.

Intrigued by the idea of investing? The posts below will give you the background you need:

Buying a Second Home and Renting Out the First in Canada

Buying a second house without selling the first might be the easiest path from homeowner to real estate investor. The first purchase is typically the most difficult. With a foot on the property ladder, other options become available.

Renting out your first home becomes a viable path to financial security. Any income generated helps to cover the carrying costs each month.

However, the real advantage again comes down to equity growth. You’ve already witnessed the example of owning one property worth $500,000. Now imagine what could happen if you owned two. You have a source of income, and your opportunity to increase your purchasing power doubles.

Do you have more questions about how to buy a second home? Our Peterborough real estate agents will happily walk you through all of the steps. Reach out to team@jeffandkatie.ca or call 705-243-9797 to start the conversation today.