Financial Considerations for Buying a Vacation Home

Posted by Justin Havre on Tuesday, March 6th, 2018 at 10:18am.

The Differences Between a Vacation Home and a Primary ResidenceFew things are more tempting than a vacation home for when real life is starting to get under your skin. But buying a second home—much like selling one—may not be as simple as heading there on the weekends. See how the financials, terms, and responsibilities are different, and how buyers can prepare themselves before they even start looking at what's available on the market.

Mortgages and Financials

A vacation (or second) home is typically defined as a second home, as opposed to a rental home which would qualify as an investment opportunity. (Certain areas of Canada will not even allow rentals.) Second homes can be purchased for as little as 5 percent down (with LMI), while a rental property will require at least 20 percent down.

Buyers of a second home will have a wide variety of potential incentives and benefits that aren't available for rentals. For example, if a buyer is able to put 20 percent down on the home, they can get a conventional mortgage. They also have access to more options when it comes to lenders, with some offering a home equity line of credit in case the owner needs to use their equity for future expenses. A true vacation home cannot be rented out and must be purchased with personal income only.

Types of Properties

A vacation home in Canada can either be a Type A or a Type B property, though both require the owner to live at the home at least part of the time. A Type A home is classified as one with central heating, plumbing, running water, and electricity. There's a maximum loan cap of $750,000 in the metro Calgary, Vancouver, and Toronto areas and $600,000 for all other areas. It must have a foundation that's below the frost line, whereas a Type B property can be built on a floating foundation (e.g., on cinder blocks).

Type B properties need running water, but they do not need a heating source. A Type B property usually has a maximum loan amount of $375,000, though this amount may be raised depending on extenuating circumstances. Down payments for Type B properties must come from either a savings or retirement account, existing home equity, or proceeds from a previous Evanston property sale.

Upkeep and Maintenance

Taking care of a home when an owner isn't there requires a lot of coordination and time. If there's a major storm, an owner will need to either have a designated person to care for the property or they'll need to drop their plans to head with the problem. One thing that may help is letting friends and family stay at the home periodically from time to time.

Both types of property can be loaned out to people, so long as they're not being charged rent. However, even this may not be enough to keep the property up to code, especially if renting in a heavily regulated area. There may also be new tax laws introduced in the area as time goes by that an owner may or may not be able to pay for.

While a vacation home may enjoy some of the same benefits as a primary residence, there are enough differences to make a buyer pause before going through with the final purchase. Talking to a financial advisor or a real estate agent can make it easier to decide if it's a practical choice for you.

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