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How much should you budget for a second property?

31 March 2021 by National Bank
Cost to buy a second property

Thinking of buying a second home soon? Maybe a condo by the ski slopes, a cottage by the lake, or a house in Florida? Here’s our advice on making a budget and financing your purchase. 

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How do you choose the right second home? 

Before thinking about a budget, ask yourself what kind of second home is right for you. To help you make the right choice, think about your lifestyle and your needs: 

  • How far are you willing to travel to get to your residence? 
  • How do you plan on using it? Do you think you’ll be there every weekend or only at certain times of the year, like over the summer or winter?
  • How big should it to be? 
  • What kind of house do you want (condo, cottage)? 
  • Do you prefer being by a lake or by the ski slopes?
  • What kinds of services would you like nearby (stores, restaurants, grocery stories, pharmacies)? 
  • What are your hobbies? Does the home you’re after match your lifestyle? 
  • How much maintenance are you willing to do yourself? 

How do you know if you’ve made the right choice? 

If you want to take some time to think, you could rent before you buy. This will allow you to evaluate whether it’s truly the lifestyle for you. Renting can help you define your needs. You can see if you like the area and the neighbourhood. You may also come to realize that you don’t need a cottage year-round – only during the ski season. Considering it’s a major investment, renting is a less costly commitment to make before deciding to buy. 

How much should you budget for a second home?

The costs are almost the same as for a principal residence. The important thing is to make a budget to understand how much money you can free up for your monthly expenses for this second home. To make a budget, note down all your income, then all your fixed and variable expenses. Once that’s done, you’ll get an overview of your finances, which will give you a good idea of the money you have for a second home and its monthly payments. 

The fees for your second home will be comparable to those for your principal residence. Some things will cost less (insurance, Internet, heating) and there may also be additional costs (septic tank, snow removal, etc.). When you buy a second home, you have to plan for your down payment as well as for the transfer tax and property tax, not to mention any renovations if it’s an older building, plus any new furniture and household items. After all, you’re basically equipping a whole other house. 

You also have to think about maintenance if you don’t plan on taking care of that yourself. If you won’t be going there regularly, think about who’s going to maintain the premises in your absence. You could hire a professional to mow the lawn or shovel the entrance. If the residence has a septic tank, you’ll also have to research annual maintenance costs. 

Is your second home located abroad or far from your main home? Don’t forget about surveillance fees and security. Since you’ll be there less often, consider installing an alarm system or a security camera. You can also make an agreement with someone you trust that you can count on in case of any trouble. They’ll be able to quickly check on your home if there’s an issue, and they can ensure your home stays in good shape in your absence. 

If your second home is in another country 

If you’re making a budget for a second home in another country, you’ll also have to include any expenses incurred by being abroad. Other than plane tickets, you may have to pay a premium on your home insurance and sign up for travel insurance in case you need to go to the hospital, which can sometimes be expensive in other countries. We also recommend checking with the country’s authorities to learn about the implications of buying property there; by law, they may require special documents like a visa or that you may be taxed as a foreign homeowner. You will also have to pay attention to fluctuating exchange rates and to tax laws for foreign residents. 

How do you finance the purchase of a second home?

First of all, be aware that your mortgage and any expenses related to your principal residence will be taken into consideration when you apply for financing for a second home.

Determine your borrowing capacity

You first need to determine your borrowing capacity. To help you calculate this, you can use online tools or contact an advisor. 

Choose between a mortgage loan and a home equity line of credit

To buy a second home, you could opt for a mortgage loan worth up to 95% of your property’s value, as long as it’s located in Canada. If you have a down payment of 20% or more, a home equity line of credit is another option. This would give you access to up to 65% of the property’s value in revolving credit. You would benefit from greater flexibility with regards to payments, and from access to a more flexible credit limit, which you could use to invest in other goals. 

If you plan on buying abroad, your financing options are different. A mortgage expert can help you with that. 

Get a down payment

For your down payment or to completely finance the purchase of your second home, you can refinance the mortgage on your principal residence. This option isn’t available to everyone though; it depends on your personal and financial situation. However, keep in mind that the minimum down payment for a second home in Canada is 5% for an insured mortgage, and 20% for a conventional loan. 

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What impact does your second home have on your taxes? 

Did you know that selling a second home results in a taxable capital gain? Let’s say you bought a home for $300,000 and later sold it for $500,000. Here, 50% of the sales profit (meaning $100,000 of the $200,000 capital gain) will be added to your income and will be taxed the year it was sold. Any major renovations you made can be added to the initial purchase price to lower your capital gain. 

Also, take the time to research the process involved in transferring real-estate property to a family member. For example, giving or selling a second home to your child has tax consequences on yourself and on them. Finally, keep in mind that there’s a capital gain exception for principal residences that you may be able to take advantage of under certain conditions. 

How do you monetize your second home?

In order to monetize your second home, you can rent it out when you’re not using it. Take the time to ask yourself a few questions to make sure you’re making the right decision:

  • Do you have the time to do this yourself? Do you prefer to hire an agency who will take care of things for you? 
  • Can you count on a trustworthy person to greet your renters if you can’t be there yourself? 

Don’t forget that if you decide to rent out your second home, the money you make will be considered a source of income and must be added to your tax returns. Any costs incurred to earn rental fees must be included in your budget, but they may be tax deductible. 

If you want to talk about your goal of purchasing a second home, our mortgage experts can help you analyze your situation and find better options for you. We’re here to answer your questions. 

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Where do I start if I want to buy a home?

We're here to answer your questions.
Even from a distance.

Learn more