June 10, 2019
As temperatures rise across the country (summer is coming, right?), we’re dreaming of getting out of the city. A weekend away at the lake or a month-long retreat in the mountains, we all need a break from life’s hustle and bustle. Sure, staying in a hotel is nice, but sometimes you want a place you can call your home away from home. Buying a vacation or recreational property is exciting, but there are a few questions to answer about before you ‘dive’ in.
CAN I AFFORD A SECOND PROPERTY?
This is the first question you should answer before looking at buying a second property. It means there will be double the mortgage payments, electricity bills, insurance payments…the list goes on. Before you start playing with the mortgage payments, talk with your financial planner or mortgage broker about using the current equity in your home to help finance a second property.
If you already own your own home some lenders may allow you to refinance the mortgage on your primary home to help finance the purchase of a vacation property. If you plan on winterizing and using your property year-round you may be also eligible for the secondary/vacation homes program which allows you to pay as little as five per cent for a down payment.
Consumer debt should be the first thing on the priority list as Canada’s consumer debt is at an all-time high. Paying off our mortgages should also be a priority as the OSFI (Office of Superintendent of Financial Institutions) increased the Bank of Canada’s Interest rate three times in the past year. Economists predict that it won’t be stopping there, therefore, this is a critical time to pay off debt.
CAN I USE MY RRSP'S FOR A DOWN PAYMENT?
You may be able to use your retirement savings for a downpayment under Canada’s RRSP Home Buyers’ Plan for a second property even if you have benefitted from the plan before. As of March 2019, first-time buyers can now use up to $35,000 from an RRSP to buy a home. You can qualify as a “first-time buyer” more than once if you (or your partner) didn’t buy a home under the program that was your primary residence in the four years prior to purchasing your vacation property. You are still required to repay the amount withdrawn from your RRSP within 15 years.
WHAT ABOUT TAXES?
Before buying a vacation property, make sure you’ve done your research on taxes. Where you buy will determine what kind of taxes you’ll have to pay.
If you plan to sell your vacation property at some point, any equity increase that is not on your main home will come with a capital gains tax. 50 per cent of what you gain in the sale of your property is taxable. That 50 per cent is added to your annual income and your personal tax rate is applied to that total (at the Federal tax level). The higher your income, the higher the capital gains tax. If you plan to have the vacation home included in your estate, your heirs will assume any capital gains tax after the sale. Make sure you keep all of your documents related to the purchase and sale of your home so it’s a bit easier come tax time.
And finally, keep in mind that the folks at the Canada Revenue Agency will want any income you earn from renting out your vacation property claimed on your taxes. The CRA also considers providing cleaning, security, and meal services as part of running a business that will all need to be claimed on your taxes as well.
DO I NEED MORTGAGE INSURANCE?
As with your primary home, you will need insurance for your vacation property. Depending on how you’re going to use the property this can be seasonal, year-round, or rental coverage. Insurance can protect your property from damage caused by such things as fire, theft, and vandalism (and in some cases, animals!).
Since your vacation property is likely to only be occupied part-time, you may be insured on a named perils policy instead of a comprehensive policy. With a named perils policy, you will have insurance coverage for specific risks, such as fire, explosion or smoke damage. Coverage for other risks, like water damage or vandalism, may be more difficult or costly to arrange since you’re less likely to discover any damage right away. If a pipe bursts while the property is vacant, the damage is likely to be more severe since you won’t discover it right away.
There are items that probably won’t be covered at all by the policy for your vacation property, such as motorized vehicles (snowmobiles, ATVs, etc.), campers or trailers. Coverages vary by each insurance company, so do your research or use an insurance broker to search the marketplace to find your best options. Get free quotes with Home Auto Life for your vacation property insurance.
CAN I RENT IT OUT TO OTHERS?
Services like AirBNB and HomeAway make renting out your home easy but there are many factors that go into whether you can rent your property out to others. Our best answer: it depends. Here are a few questions you should ask before planning to rent your second property.
Each case is different so we recommend talking to a group of professionals including your realtor, accountant, lawyer, insurance agent, and of course, your mortgage broker.
IS OWNING A VACATION PROPERTY WORTH IT?
Ok, there are a lot of factors to consider when buying a vacation property. But, do not let the costs deter you from investigating the possibility of spending your summers by the lake, in the mountains or on the golf course. With many lending and purchasing options available to you, owning a vacation property might be easier than you think.
Source: Quantus Mortgage
Please feel free to contact me with any questions you may have. It would be a pleasure to assist you or any one of your friends or family members!