Are you thinking about purchasing a second property, maybe one to use as a vacation home or an investment property? Before you do, there are many things to think about, like the down payment, mortgage rules, and whether you can afford it. Below, we’ll explore what a second property is, how to buy one, and what types of home insurance you may need for it.
What is a second property?
Typically, a second property is a place you buy besides your main house or primary residence, where you plan to either live for part of the year or use it as an investment property. It could be a:
- Cottage
- Vacation home
- Condo used during the week by someone who commutes to work in the city
- Home used by your child while away at school
- Investment property, like a rental property
Refinancing your mortgage to buy a second property
One way to help pay for your second property is to use the equity in your current home to finance a new property. This means you borrow money against the value of your home, using it as collateral. One popular way to do this is to refinance your mortgage on your primary residence.
Refinancing your existing mortgage means replacing your current mortgage with a new, larger loan, either with your current lender or a new one, to access your home’s equity. This allows you to borrow more money at, generally, a lower interest rate than through another type of loan.
How refinancing a mortgage works
If your current mortgage is less than 80% of your home’s appraised value, refinancing might be a good option because it allows you to get a mortgage up to 80% of your home’s value. For example, if your current mortgage is 50% of your home’s value, you could refinance to borrow the remaining 30%, making your total mortgage 80% of your home’s value. This is useful because your home equity increases as your home’s value rises and as you pay off your mortgage. Refinancing can let you borrow more money, which you can then use as a down payment on a second property.
Keep in mind, however, that if you break your current mortgage early, you may have to pay a penalty. You’ll also need to negotiate the terms of the new loan based on current interest rates. Ultimately, refinancing a mortgage can allow you to leverage equity that would otherwise be tied up.
Other financing options for a second property
In addition to refinancing your current mortgage, there are a few other options to help you finance a second property:
A home equity line of credit
You might be able to set up a revolving line of credit with a lender using your home equity as collateral. Typically, you need to have a high credit score and at least 20% equity in your home. A HELOC (home equity line of credit) lets you access up to 65% of your home’s value and use the account like a secured credit card, borrowing and repaying money as needed.
HELOC interest rates are usually higher than mortgage rates but are generally offered at a much lower interest rate than a traditional line of credit. Unlike with a mortgage, you don’t have to make fixed payments for the principal and interest with a HELOC. You just need to make your monthly interest payment.
Taking out a second mortgage
Another way to finance your second property is by taking out a second mortgage, also known as a home equity loan. A second mortgage is like an extra loan that comes after the first mortgage on the same property.
This is riskier for the lender because they are in the second position on your property title, meaning it may not be available to everyone. Because of the higher risk, your second mortgage provider will likely charge a higher interest rate. You’ll also have to pay the same administrative costs as with your first mortgage, like home appraisal and legal fees. Before approving a home equity loan, a lender will look at:
- Your income
- Credit score
- How much equity you have, whether in your home or in other properties
The more equity you have in your first property, the better your chances of getting a second mortgage. Generally, if you have less equity or a lower credit score, a second mortgage might be a better option than a home equity line of credit (HELOC).
Can you afford a second property?
In an ideal situation, you’d be able to buy your second property outright. However, most people will need to apply for a mortgage for their secondary property and provide a down payment. Continue reading to discover more:
Mortgage
If you need a mortgage, your mortgage broker or lender will check your financial situation. You may need to:
- Pass a stress test to qualify for a mortgage
- Have a good credit score for the best rates
- Have an acceptable debt-to-income ratio
Some mortgage lenders may also include any future rental income from the new property to help you qualify for a larger loan if you plan to rent it out for part of the year. If you are approved for a mortgage, the interest rate will depend on your financial profile, market rates, and other factors.
As we mentioned, mortgage interest rates on a second property tend to be higher. This higher rate will greatly affect how affordable your new home is, so it’s smart to compare offers and find the best mortgage rate. Then, you’ll need to consider whether you can afford these additional mortgage payments on your new mortgage loan.
Down payment
The main difference when buying a second property is the down payment, which is the money you need to pay upfront. Typically, a 20% down payment is the minimum requirement for a second property.
Like with your main home, the down payment depends on the purchase price. However, for second properties, the number of units and whether the owner will live there also affect the down payment amount.
Other expenses
Just like you do with your primary residence, you’ll need to budget for additional costs for your secondary home, like utilities, property taxes, insurance, maintenance, and emergency repairs.
Common uses for a secondary property
Below are some of the most common ways secondary property owners use a second property:
Secondary home
Some jobs require a good deal of travel or time spent in another city. In cases like these, some homeowners purchase a second property, like a condo, in that city to have a place to stay either during the week to avoid long, daily commutes or while away for work for extended periods. Having a second home in a place they often visit for work or other reasons lets them come and go without worrying about finding other accommodations.
Another common reason for purchasing a secondary home is to provide your child with somewhere to live off campus while they’re away for school. While dorms and apartments are straightforward, they involve paying rent, and those payments don’t offer any extra benefits. Buying a home for a college student to live in, on the other hand, can be seen as an investment, as once they’ve graduated, the home can become an investment property.
Vacation home
Who doesn’t dream of having a vacation home? Whether it’s for a short weekend getaway or long summer or winter stays, vacation homes are a popular reason to purchase a second property.
Investment property
Some homeowners buy a second home as an investment property. This usually means they plan to either flip and sell the home or use it as a rental property. However, keep in mind that investment properties have different rules and mortgage rates compared to other second homes.
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Is a second home the same as an investment property?
No. A second home is a property where the owner lives at least part of the time (owner-occupied). This could be a vacation property or a condo for someone who commutes to work in the city. It also includes multi-unit homes where the owner lives in one unit and rents out the others.
If you won’t be living in your second property at all (non-owner-occupied), it’s considered an “investment” property. This means you need to meet specific requirements to get a mortgage. Also, some smaller lenders may not offer mortgages for investment properties.
Is buying a second property a worthwhile investment?
The benefits of owning a second property are pretty clear. A nearby cottage, cabin, condo, or trailer can offer a quick weekend getaway, a summer home, somewhere to stay during the week to avoid long commutes, or to use for a secondary income. However, whether it’s worth it depends on your life and retirement goals, the type of home you’re buying, if you plan to rent it out, and how you will pay for it.
To make an informed decision, you need to think about both financial and personal factors. Consulting a financial advisor can also help you see how buying another property fits into your overall financial plan.
Insurance for a second property
While property insurance isn’t mandatory, most mortgage lenders will require you to carry it. The type of insurance you’ll need for a secondary property will depend on how you plan to use the property:
- Homeowners insurance if you or your child plans to live in the home
- Vacation property insurance if you plan to use it as a vacation property
- Vacation property rental insurance if you plan to rent out your vacation property for part of the year
- Landlord insurance if you plan to use it only as a rental home
- Condo insurance if your second property is a condo
Understanding the different coverage options is crucial for making informed decisions that protect your assets and provide peace of mind. From auto and home insurance to life and business policies, each type offers unique benefits and serves specific needs. Let’s explore these types of insurance further:
Homeowners insurance
Homeowners insurance coverage can differ between providers, but most policies include dwelling, contents, and liability coverage. Dwelling coverage protects your home’s physical building and structure from damage caused by perils like fire, lightning, smoke, and falling objects. Contents coverage covers your belongings inside your home, including items like furniture, clothing, electronics, jewellery and sporting equipment. Liability coverage protects you should a third-party visitor be injured on your property. There are three main levels of home insurance:
- Basic/standard insurance covers your home from damage caused by events like fire, lightning, wind storms, and hail
- Broad coverage offers more protection, including basic coverage, plus protection against theft and vandalism
- Comprehensive home insurance covers your home against damage from many different causes
Vacation property insurance
Seasonal vacation property insurance is usually more expensive than regular home insurance because there’s a higher risk of theft, burglary, and vandalism. Since you don’t live there all year, damage can go unnoticed and get worse if not fixed quickly. There are two main forms of vacation property insurance:
- Comprehensive coverage gives extended protection for your year-round vacation property, including boathouses, sheds, bunkhouses, and your belongings
- Broad form or basic insurance covers only the specific risks listed in your policy
These forms of insurance typically include dwelling coverage, contents coverage, and liability coverage. Leaving your seasonal property unattended for a long time can lead to losses or damages that aren’t covered. It’s important to check your vacation property regularly for safety and security.
Vacation property rental insurance
Renting out your vacation property is a good way to earn extra money and encourages you to keep it in good shape. Vacation property rental insurance might be available based on how often and how long you rent it out. It includes the same coverage as vacation property insurance plus additional coverage for temporarily renting out your property.
Landlord insurance
Landlord insurance is meant to protect landlords from the risks they face. These risks include damage to the rental unit, damage to their belongings, claims made against them by others, and lost rental income. It typically includes dwelling coverage, contents coverage for landlord belongings, liability coverage, and loss of rental income coverage.
Condo insurance
Your condo corporation is responsible for insuring the building and common areas, but their coverage stops at your unit’s door. This means you need your own insurance policy to cover your belongings, liability, and any improvements you’ve made.
Condo insurance protects your things, like clothes, electronics, and furniture, if they are damaged or destroyed. It also covers repairs in your condo unit and pays for hotel costs if you can’t live there during repairs. Additionally, condo insurance provides liability protection, helping cover legal fees if you’re sued for damage or an accident in your unit.
Other types of home insurance for a secondary property
We’ve covered the standard insurance policies you may need for your second home. Now, let’s talk about additional coverage that you may want to consider adding to your second property’s insurance policy below:
Business coverage
If you run a business out of your secondary property, you’ll need extra coverage. Standard home or vacation insurance doesn’t cover business activities. Without business coverage, you might not be covered if there’s damage to your home from your business operations.
Sewer backup coverage
A sewer backup is a nightmare for homeowners. If your policy doesn’t include this, you should think about adding it. A sewer backup can cause a lot of damage, and the costs can quickly pile up.
Overland water coverage
Similar to sewer backup coverage, overland water protection is a type of flood insurance. It protects your home from flooding or water damage caused by freshwater flowing above the ground. This can be especially important if your secondary property is located anywhere near lakes or rivers.
Equipment breakdown coverage
This extra coverage kicks in if the equipment in your secondary home suddenly or unexpectedly fails. It might cover:
- Air conditioning unit
- Furnace or heating system
- Security system
- Kitchen appliances
- Washer or dryer
- Home business-related equipment
Builder’s risk insurance
If you are purchasing your second property with the intention of flipping and reselling it, you’ll need builder’s risk insurance. Builder’s risk insurance, also called course of construction insurance, protects your construction project while it’s being built. It covers new projects, renovations, and rebuilds. Construction sites have different risks than finished buildings, so it’s important to get this insurance before starting any work. If something major happens during construction, builder’s risk insurance can help pay for:
- Repairing damage to the property
- Replacing building materials
- Removing debris
- Legal or architectural costs
Whether you’ve hired a contractor or are doing the renovations yourself, builder’s risk insurance is essential coverage to have.
Tools and equipment coverage
Builder’s risk insurance doesn’t cover your tools or equipment. Getting tools and equipment coverage can help pay for renting or replacing your tools if they get damaged or stolen while flipping your property.
How to save money on your second property insurance policy
We know that paying for a second insurance policy can add up quickly. That’s why the experts at BrokerLink have put together the following helpful tips and tricks to help you start saving on your insurance today. Keep reading to find out more:
Shop around
Don’t just accept the first insurance quote you find. Since a second property can be used for so many different reasons, make sure you spend some time comparing different property insurance policies from multiple companies to find the best one for your needs.
Bundle your policies
Another great way to save money with many insurance companies is to bundle your insurance policies. While not every policy can be bundled, you can bundle your home insurance with vacation property insurance and auto insurance. So, to help reduce your costs, ask your insurance provider or broker about bundling two or more of your insurance policies.
Raise your deductible(s)
Opting for higher deductibles for your property insurance is another way to lower your premiums. Premiums and deductibles are linked, so raising your deductible can reduce your premium cost. This works because a higher deductible means you’re taking on more financial responsibility, which lowers the insurance company’s risk. However, keep in mind that if you make a claim, you’ll have to pay more out of your own pocket.
Review your coverage often
Review your current policy every year and remove any coverage you no longer need. Many people have too much coverage, high limits, or low deductibles. By updating your policy—renewing coverage, lowering limits, or raising deductibles—you can save money. When it’s time to renew, ask a BrokerLink insurance advisor to review your policy. They can help you decide which coverages are necessary and which ones you can change or drop.
Avoid filing small claims and maintain your property
To keep your insurance premiums low, try not to file claims unless you really need to. Take good care of your property, update important systems through renovations, and fix small problems before they get bigger. If you don’t file any claims, you might qualify for a claims-free discount on your property insurance.
Work with a local insurance broker
Every property owner wants the best insurance, but too much coverage can mean high premiums. When you buy directly from a company, they might push you to choose more expensive options. A broker can help by regularly reviewing your coverage and pointing out unnecessary coverages or coverage limits. At BrokerLink, our licensed brokers are dedicated to finding you the best coverage at a reasonable price. We’ll connect you with an insurance advisor who understands your needs and can find a policy that fits your property and needs. Whether you need insurance for your vacation home, rental property, or condo, we’ll compare quotes from top Canadian providers to get you quality coverage at a great price.
Learn more about insurance for your secondary property with BrokerLink
Whether it’s a second home for yourself, a loved one, or an investment property, let BrokerLink help you protect your second property with the right insurance. To find an insurance plan that’s right for you, visit any one of our branches across Canada or reach us by phone or email. You can also complete a free quote in just minutes online using our free online quote tool. Contact a local BrokerLink insurance advisor to discuss your secondary property insurance needs today!
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