Financing Recreational Properties

With more and more people purchasing a second or vacation home, financing recreational properties are not as hard as it used to be. Different financing options make it possible for people from all walks of life to be able to afford a second or vacation home.

When looking at financing your recreational property, you must take a few things into consideration:

Your current financial status
What type of property are you looking at
How are you going to use your property

In general, there are three options for financing recreational properties:

1. CONVENTIONAL MORTGAGE

With a conventional mortgage you make a downpayment of at least 20%, thus financing 80% of the value of your property.

Just as with any other mortgage, there are certain criteria that you will have to meet in order to qualify for a conventional mortgage.

Your TDS (Total Debt Service Ratio) may not exceed 40% of your annual income. What this means is that all your payments, including a mortgage payment on a first home (Or rent payment if you are renting), and the mortgage payment on the second home, cannot be more than 40% of your income.
The property must meet the criteria of your lender,
Your credit record must be acceptable to your lender,
Depending on your lender, you must be able to prove your income and job stability.
2. INSURED MORTGAGE

If you don't have at least 20% downpayment, Canada Mortgage and Housing Corporation as well as Genworth Financial offer mortgage insurance for financing recreational properties. Mortgage Insurance does not mean insurance on your house or the contents, or even insurance against death or disability. Mortgage insurance benefits the lender as it insures the lender against you defaulting on your mortgage. Mortgage Insurance makes it possible for home buyers to buy a second home with as little as 5% down payment. This is a new option for buying recreational properties, as 95% financing was only available for the purchase of a primary residence in the past.
Something that must be kept in mind when you take out an insured mortgage for a second or vacation home, is that this property must be for personal use, in other words, your cannot rent it out for the periods that you will not be utilizing the space.
Bear in mind that whether you take a conventional mortgage or an insured mortgage, there are some limitations as to the kinds of property that you can purchase with a mortgage. Lending institutions will only lend to buy single family homes, and condominiums. Banks and other major lending institutions are not financing recreational properties such as fractional units, timeshares or RV Lots. If you are thinking about purchasing this kind of property, your best bet will be a
3. HOME EQUITY LINE OF CREDIT (HELOC)

This kind of financing makes use of the existing equity that you have in your primary residence. Equity is determined by the value of your house, minus the outstanding mortgage. You can withdraw up to 75% of the equity in your home to use for purchasing a vacation or second property. Your lender will request that an appraisal be done by a certified appraiser to determine the current value of your home. You will also need to provide them with an current mortgage statement to verify the outstanding mortgage amount, or a copy of the title if you do not have a mortgage on your house.
Not only can you buy unconventional vacation properties with a HELOC, you can also buy recreational properties outside of Canada, which is not the case with either a conventional or insured mortgage.
Whatever your situation is, make sure that you speak to both your financial adviser and your mortgage broker about the best option for you and your family.

Now that you know that financing recreational properties is not as challenging as it used to be, you might want to consider the different types of recreational properties available in today's marketplace.

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