Should you get a second home or an investment property?

Getting ready to purchase a second property is an exciting time in your home ownership journey. The opportunity to own another property for vacations or for generating extra income both have a high appeal. But when deciding if you want a second home versus an investment property, there are important factors to consider, which includes mortgage requirements and tax implications, which differ for each. 

Here’s everything you need to know about the differences when purchasing a second home or investment property to help you decide which one is best for you. 

What’s the difference between the two?

Getting a second home

A second home is defined as a second property you purchase that you plan on living in for part of the year--or other members of your family, like your parents or even your kids who might be going to University in the area, for example. This can be a cottage, a vacation home, or even a condo, elsewhere, that you occupy during part of the week. The important factor to classify it as a second home is that you have to occupy it for part of the year, at least 14 days per year, while you’re also living at your primary residence. 

What might surprise many people about a second home is that, depending on your lender and their vacation home lending program, you’re actually allowed to rent it out for part of the year, without it being considered an investment property. As long as you live in the home for a minimum of 10% of the days that the home is rented (or at least 14 days per year), your second home is allowed to be rented out. This can include summer rentals both short or long term that can help you generate additional income. 

The bonus is that the income generated from a second home isn’t tax deductible–as long as you’re occupying the home for the minimum period of time required. The downside, though, to this is that you’re not able to claim any expenses or renter tax deductions.

Getting an investment property

An investment property on the other hand, is a property purchased for the sole purpose of generating income by renting it out to a third party. Unlike a second home, there is no minimum occupancy required by the owner, however the property must be a single family unit and can’t be rented. A family member of the owner must be living in the property, rent-free. 

How do the mortgage requirements differ for these properties?

When you apply for a second mortgage, you’ll be asked if the home is going to be used as a second home or investment property. And depending on what type of property you’re purchasing, the requirements for lenders can vary. For the most part, many of these qualifying criteria are the same as purchasing your first home: passing the mortgage stress test, having a good credit score, and a regular source of income. 

If you’re using the property as a second home, the minimum down payment required is 5%, the same minimum across Canada for purchasing a primary residence. 

However, if the property is valued above $500,000, you’ll need more than a 10% down payment. More specifically, your minimum down payment will be calculated in two parts: the first is 5% of the first $500,000 of your purchase price and then 10% of the remainder, up to $1,000,000. This averages the downpayment to come out to somewhere between 5% to 10% of the total purchase value. 

Investment properties however, require a 20% down payment. While this initial payment is much larger, meeting your income requirements for the mortgage is much easier. This is because investment properties allow you to qualify for your mortgage while using anywhere from 50% to 100% of the potential future income of the property you’re renting. Moreover, with a 20% down payment there is no mortgage insurance required. 

The bottom line: pros and cons

All in all, both a second home and investment property each have their pros and cons that make them good options for a second property. 

At the end of the day, it all comes down to your preferences when choosing what your goals are with a second property, whether it be a vacation option or a stream of income. Once you’ve found your potential second property, one of Pine’s mortgage agents would be happy to speak with you to help with this next stage in your homeowner journey.