You loved where you stayed for holidays. And you can't help but think, "Hey, maybe it's time to buy our own investment getaway." What are your mortgage options in Canada?
Lenders actually aren't eager (understatement) to provide mortgages for homes or condos that will be rented out for short-term stays. Yet, short-stay platforms, such as Airbnb and Vrbo, have changed the way many of us travel. Someone has to own it first (often through a mortgage) before it can be offered on these platforms. So what gives?
Of course, you can absolutely buy a vacation home or investment property based solely on your mortgage qualifications. But if you're buying with the intent of using short-stay rental income to cover your mortgage payments, you'll quickly find out that lenders don't view short-term rentals the same way as long-term tenants.
What are your mortgage options for buying the getaway you fell in love with?
Here's what you need to know for owning it, rather than always renting it.
If you already own a home that you're living in, buying a vacation home or condo typically has stricter regulations and qualifying requirements as a 'second home' purchase.
But that doesn't mean that a great solution — or great rate — is out of reach. Finding the right lender, rate and flexible mortgage product is essential, and there are details you'll need to consider, such as property amenities and site access, for securing this type of mortgage.
Some lenders provide high-ratio mortgage options for as little as 5% down. Other situations may require a higher down payment of 20% or more for a conventional mortgage. Depending on the property type and owner occupation, you can apply for a purchase, or refinance to access your current home equity in support of your vacation home-ownership goals.
Read more about: Vacation and Second Home Mortgages
Purchasing a home or condo specifically to generate rental income means that you'll need to apply for an Investment Property mortgage. Again, this type of mortgage has differing requirements and qualifications. You'll be able to access your best rates (with a small premium) if you have at least 20% for down payment, good credit and steady income sources.
But here's what you really need to know. If you plan on renting it out for short-term stays when you're not there (like on Airbnb or Vrbo) instead of having long-term tenants, you likely won't be able to secure this type of mortgage. Generally speaking, mortgaging a property specifically for short-term rentals will be difficult, if not impossible:
So then, for short-term rentals, you would need a 'commercial' mortgage (as a registered business), which is more expensive, harder to qualify for, and comes with a lengthier approval process. (A Bed and Breakfast is an example of this type of commercial mortgage.)
BUT, on the other hand, if you purchase an investment property to generate long-term rental income, you may be able to pay off your mortgage faster. In that case, you can work up to having the cash upfront to entirely buy a vacation home. At that point, the world is your 'Airbnb' oyster — meaning you can rent it out to your heart's content without worrying about a lender's disapproval.
Read more about Investment Property Mortgages
Have a lot of equity built up in your current home?
Talk to us about a refinance to provide the cash to buy your vacation home or condo outright. You'll likely save more with a lower interest rate and one mortgage payment, and the cash purchase will provide you with more flexibility to offer it for short-term rental, without the worry of affecting your mortgage agreement.
In this case, without a mortgage on your second-home purchase, the income you may generate from utilizing short-term rental platforms, like Airbnb or Vrbo, may help you offset the costs involved to rent it, or help you pay down your existing mortgage faster.
Read more about Refinancing Options
Private lenders are just that. They aren't regulated like government-backed financial institutions and may allow your short-term rental intention for your home or condo purchase, basing your qualification on the home's location and the equity you have in it.
To take this (mortgage) route, you'll pay a higher mortgage rate, have to increase your down payment, and will likely have less flexibility for payments or payout options.
We can help determine the best lender for your needs, depending on your particular details. What works for you?
Short-term rentals are everywhere. Yet, lenders don't approve. Many lenders even propose that they may review your mortgage at renewal time, especially if you have missed payments or are suddenly in arrears.
The A and B lender environment is currently at odds with homeowners using short-term stays to supplement their income. So tread carefully and make sure your mortgage stays in good standing.
Many provinces, cities and towns are implementing or contemplating increased regulations, restrictions or higher licensing fees to discourage short-term rentals vs. long-term renting or purchasing as a primary residence. For example, BC just announced a tenfold increase in their licensing fees.
Ensure you're up-to-date about local regulations before buying and renting out short-term.
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