Important Facts About Buying and Financing a Cottage or a Second Home in Ontario

Introduction

Purchasing a second home or cottage in Ontario involves meeting specific credit, borrower, and property requirements. It’s important to understand these requirements, as well as the various transaction types and property classifications, to ensure a smooth and successful purchase process. This article provides a detailed overview of these important factors, making it a valuable resource for anyone considering buying and financing a second home or a cottage in Ontario.

Understanding Second Homes

A second home is 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 for someone who commutes a great distance to work in a city. If your second property is non-owner-occupied (meaning you will not be living there at all), or if it is occupied by tenants, then it’s considered an investment property, and will not be eligible under the second home financing program.

Mortgage Rules for Second Homes in Ontario

In Ontario, as in rest of Canada, the mortgage rules for buying a second home are similar to those for buying a primary residence. Here are some key points:

Property Eligibility and Classifications

The property must be intended for occupancy at some point during the year by the borrower or a relative of the borrower on a rent-free basis. Seasonal vacation properties are not permitted. The property must meet certain criteria, such as having a permanent source of electricity, a permanent foundation, and a minimum of a kitchen, 3-piece bathroom, bedroom, and common area. The property must have year-round access, and also to be fully serviced with municipal water and sanitary sewers, or well and septic tank, or a combination of both. The property must be winterized with a permanent heat source. For example, heating can be baseboard, forced air, water radiator, radiant, coal, propane, geothermal heat pumps, or heat pumps. The property must have good market appeal in the area with no adverse influences or neighbourhood nuisances. The property must be a single-family dwelling, either new or existing, with estimated remaining economic life of the property should be a minimum of 25 years. For high ratio insured financing, the maximum purchase price/lending value be less than $1 Million.

Ineligible Property Types and Features

Island properties without bridge access, fractional homeownership, condominium hotels, investment, rental pool or timeshare properties, life leases, rental properties, non-winterized homes with seasonal access are not eligible.

Eligible Transaction Types

The program recognizes that borrowers may require a secondary home for a variety of reasons. The program enables borrowers with a strong credit history to own a second home with as little as 5% down. The program allows for a variety of eligible mortgage products including Fixed or Variable Rate mortgages, and both purchases and refinances.

Certain transactions are ineligible under this program, including programs for Non-Permanent residents, Temporary Residents, Newcomers to Canada, Rental Property Program, Owner Occupied-Rentals, etc.

Credit and Borrower Requirements

Borrowers must meet standard credit qualification criteria. To qualify for a second home or cottage in Ontario, you need a strong credit history with no late payments rated R3 or higher reported to the credit bureau in the last 24 months, and no prior bankruptcies or judgments.

The Gross Debt Service (GDS) and Total Debt Service (TDS) ratios are capped at 39% and 44% respectively for those with a credit score of 680 or above. The calculation for borrower qualification must include servicing of both properties, including taxes, heat and 50% of condo fees, if applicable, for the customer’s principal residence.

You will need to qualify for the mortgage under the Canadian mortgage stress test. This means you must prove you can afford payments at a qualifying interest rate which is typically higher than the actual rate in your mortgage contract. At the time of writing this article, the qualifying interest rate is the greater of the contract mortgage rate plus 2%, or 5.25%.

Down Payment Explanation

Down payment from own resources is preferred, but gifted down payment from immediate family members may be accepted. An immediate family member is defined as a father, mother, child, brother, sister, grandparent, legal guardian, or legal dependents. Borrowed Down Payment may be allowed, if borrowed from any source that is arm’s length to the purchase or sale transaction. This may include personal loans, lines of credit, or lender credit. Loan payments must be included in the TDS calculation. Gifts or grants from any party that is arm’s length to the transaction may be considered. Sources that are not arm’s length to the transaction, either directly or indirectly, are ineligible. Ineligible sources include, but are not limited to: builder incentives or loans, real estate or mortgage broker incentives, or loans to the borrower that impact the property selling price.

Tax Implications

When you sell your second home, any profit or gain could be considered a capital gain or profit, in which case it could be taxable. Disclaimer: Please note, we are not tax professionals, and as such we are not in position to provide tax advice. The information in this article is not intended to be a substitute for professional tax or legal advice. Each person’s situation differs, and a professional tax advisor, as well as lawyer can assist you to your best advantage.

Considerations for Buyers

Owning a second home means you have one more place to call yours where you are secure and have a lot of opportunities to unravel. Another advantage of owning a second home is that it builds equity over time. Before buying a second home or cottage in Ontario, consider factors such as the costs associated with buying, the location, the condition of the property, your financial situation, and the future use of the property. The costs related to buying a second home are similar to buying a principal residence that you live in. These costs are on top of your down payment, and your regular mortgage payments. Examples include home inspection fees, legal fees, property tax adjustments, and title insurance. In addition to the costs mentioned, there could be other costs such as land transfer taxes, mortgage default insurance (if your down payment is less than 20%). It’s also important to consider the ongoing costs, such as maintenance, repairs, insurance, utilities and property taxes.

Conclusion

The decision to buy a second home or cottage requires careful consideration of various factors, including financial planning, market trends, and legal and tax implications. It’s crucial to consider all these aspects before making a decision. Remember, buying a second home or a cottage is not just about the cost; it’s about making a lifestyle choice. If this is something you’re considering and need further assistance regarding the financing side of the transaction, feel free to reach out to us through our website or call us at (519) 252-9665. We’re here to help guide you through the process.

Please note that this information is current as of the time of writing and is intended for general informational purposes only. It should not be relied upon as financial advice. Always consult with a mortgage professional for advice tailored to your specific circumstances.

This article was brought to you by TheBroker.ca Ltd., a licensed mortgage brokerage. Our licensing status with the Financial Services Regulatory Authority of Ontario (FSRA) can be confirmed through this link.

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