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Here’s what home owners and investors should know about the rules, financing options and tax implications of buying a second property.
What does it take to buy a second home in Canada? There’s a lot to consider, from figuring out whether you can afford to buy a second property (and whether it’s worth it) to navigating the down payment requirements and mortgage rules. To help you get started, we’ve answered these questions and more.
Generally, a second home refers to a real estate property that is owner-occupied, meaning the owner will be living in it at least part of the time. It can refer to a cottage, a vacation home or a weekday residence (like a condo) for someone who commutes far to work in a city. A multi-unit dwelling where the owner lives in one of the units and rents out the others is also considered an owner-occupied residence.
For mortgage lenders, it’s the “owner-occupied” part that matters. If your second or third property is non-owner-occupied (meaning you will not be living there at all), then it’s considered an investment property. And that means you’ll have to meet specific requirements to get a mortgage. Some smaller lenders don’t provide mortgages for investment properties.
If you’re already a home owner in Canada, you’re likely familiar with many of the qualifying criteria, because many of the requirements for buying a second or third property you will live at are the same as for buying a principal residence. You will have to qualify under the mortgage stress test, have a good credit score (especially if you want to get the most competitive mortgage rates) and have a debt-to-income ratio that falls within the acceptable range for your lender. Read more about the mortgage rules when buying a second property in Canada.
The one major difference with buying a second property is the down payment—the amount of money you need to pay upfront in order to purchase the home. As with principal residences, the down payment needed on a second property is tied to the purchase price of the home. However, with second properties, the number of units on the property, and whether or not the owner will live there, impact the size of the down payment as well.
Starting on Dec. 15, 2024, buyers will be able to get an insured mortgage for homes valued at up to $1.5 million, up from the previous limit of $1 million. Currently, homes worth $1 million or more require a down payment of 20% and are not eligible for mortgage default insurance. Along with raising the cap for insured mortgages, the government has announced new down payment requirements for homes valued at up to $1.5 million. Effective Dec. 15, home buyers will need a down payment of 5% of the first $500,000 of the purchase, and 10% of the portion of the purchase price between $500,000 and $1.5 million. Canadians will need a down payment of 20% for a home valued at $1.5 million or more.
If you’re able to buy a second property outright, without borrowing any funds, the process is fairly straightforward. However, if you expect to apply for a second property mortgage, your lender will need to evaluate your financial profile and risk. It will look at your income, your gross debt service (GDS) ratio and total debt service (TDS) ratio, your credit score and other factors to determine if you qualify. Some lenders will allow a portion of the rental income from your future property to count towards your income, increasing the amount you can borrow.
If you are offered a mortgage, the interest rate will be based on your profile, as well as current market interest rates and other factors. That interest rate will have a large impact on the overall affordability of your new home, so it pays to compare offers and shop around for the best mortgage rate you can find. Here’s how to know if you can afford to buy a second property.
Once you’ve moved into your new home, don’t forget that you might be able to claim certain expenses, like legal fees, for income tax purposes. Every bit helps!
There are many great ways to save up for a real estate purchase. Many first-time home buyers use savings and investments, government programs or a financial gift from a family member for the down payment or more. In many cases, a combination of all three. Since mid-2023, first-time home buyers have also had access to the first home savings account (FHSA), a registered account designed to help first-time buyers save up for a down payment.
Current property owners have another option—they can finance the purchase of additional real estate using the equity in the home they now live in. Essentially, the buyer borrows funds against the equity in their property, using the property itself as collateral. Read more about using equity to buy a second home.
Home owners’ equity options include:
Each of the financial products and services above has its own qualifying criteria, as well as its own pros and cons. But in each case, you will need to have more than 20% equity in your current property; lenders won’t let you borrow more than 80% of the value of your current home.
In certain situations, you may qualify as a first-time home buyer a second time. So, even if you’ve previously made use of a first-time home buyer program, like the Home Buyers’ Plan, don’t write off doing so again. Generally, to qualify for a program a second time, you must not have owned a home, nor occupied a home that your current spouse or common-law partner owned, within the last four years. However, each program has slightly different rules. Read more about how it’s possible to be considered a first-time home buyer twice.
There are a lot of potential answers packed into this relatively simple question. It depends on your life and retirement goals, the type of home you’re buying, whether you plan to rent it out, and how you’re financing the purchase—to say nothing of trying to anticipate changes in real estate prices and mortgage interest rates.
To confidently answer the question, you must first consider a number of financial and non-financial factors. And you may want to consult with a financial advisor, who can help you decide where buying another property fits within your financial plan. The following columns offer some perspective, whether you’re buying a vacation home or a rental property.
The tax implications of owning a single home that you live in are pretty straightforward. You’ll have to pay property taxes, but thanks to Canada’s principal residence exemption, you won’t owe capital gains tax at the time of selling the property.
That’s not the case if you own additional properties, such as a cottage, vacation home and/or rental property. Any property that is not considered your principal residence is subject to capital gains tax. This means that if the property appreciates in value between the time you buy and sell it, part of the gain will be added to your income for the year and taxed at your marginal tax rate.
Effective June 25, 2024, the capital gains inclusion rate for individuals is one-half (50%) on the first $250,000 of a capital gain, and two-thirds (66.67%) on any portion that exceeds $250,000. The inclusion rate for corporations and trusts is two-thirds (66.67%) on all capital gains. When selling a second property that has appreciated in value, consider speaking to a tax expert or financial planner, as the bill can easy climb into thousands of dollars.
There’s a lot more to know about the tax implications of buying a second home in Canada. For example, certain capital expenses, such as replacing the roof on new a rental property, can increase the property’s adjusted cost base—and lower the amount of capital gains tax owed at the time of sale. The following columns and articles address many common questions about the tax implications of owning more than one property.
Purchasing another property can be an exciting and worthwhile investment. However, it’s not for everyone. It’s always good to speak to a mortgage broker or financial advisor before purchasing real estate, but it’s even more important when considering a second or third property. An experienced mortgage broker should be well versed in the financing conditions of different lenders and can guide you through the mortgage process. And a financial advisor can help you decide if buying another property is in your best financial interests.
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