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Vacation Home Mortgage

Vacation homes can be a way for your family to get away from their busy lives and get closer to nature or a way to take a break from the usual routine. Since they are considered second properties the requirements for a vacation home mortgage may be stricter. The mortgage rate will also generally be higher than the mortgage for your primary residence. The type of property, whether is a Type A second home or a Type B vacation home, will also determine the eligibility requirements for your vacation home mortgage. Trust the experienced team at Mortgage Squad Agents to find a vacation home mortgage solution that is right for you.

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    What is a Vacation Home Mortgage?

    A common strategy that many people use that combines an investment and something for your utility is purchasing a second home or property. Whether it’s to get away from the hustle and bustle of the city and closer to nature or for a place to spend part of the year, many second homes are paid for with a vacation home mortgage. Since they are usually considered non-primary residences and second properties, the mortgage rate for vacation home mortgages are typically higher than primary residence mortgages. There are two major classifications for vacation home mortgages that define the rules and allowances for your loan and they are defined by the type of property it is for. The two property types are defined as secondary homes (Type A) and vacation homes (Type B), where a secondary home has many of the building requirements of a primary home while a vacation home is permitted to be only accessible and liveable seasonally.

    Types of Properties Eligible for a Vacation Home Mortgage

    Secondary Homes (Type A) Must have a permanent foundation that meets certification standards. It needs to be correctly zoned as residential, rural, or seasonal. Must be a freehold or condominium title, co-op ownership or timeshares are not permitted. The property must have a kitchen, washroom with a shower, a bedroom, and a common area. Must be accessible year-round on roads that are serviced. The property must be liveable during winter and meet the requirements to be considered winterized. The tap water must be drinkable Building construction and maintenance must be up to standard. Vacation Homes (Type B) – In order to be eligible for a vacation home mortgage these properties must meet the same requirements as Type A properties except for: A permanent heat source is not required. The building foundation is not required to be permanent and installed in the ground. Road access is permitted to be seasonal. The property may also only be accessible by boat. Running water is required but it is not required for it to be drinkable.

    Advantages of a Vacation Home Mortgage

    Advantages to owning an additional property that a vacation home mortgage can allow you to access include: Property Value Appreciation: A vacation home mortgage allows you to invest in a property whose value is expected to increase over time. You can leverage the appreciation and the equity you build when you sell your property. Rental Income: A property can be rented out while still being classified as a vacation home. Your rental income can help to offset the costs of your vacation home mortgage. Flexibility: Having a vacation home gives you the flexibility to choose if you want to put the property out for rent and when, and how long you want to hold on to the property for. These options give you flexibility to take advantage of your asset in a way that suits you. Risks of a Vacation Home Mortgage There are many advantages to owning a vacation home. However, a vacation home mortgage does have some risks and other considerations to keep in mind: Cost: Since a vacation home mortgage is a loan, it is a form of debt. The down payment and mortgage payments of a vacation property can be higher than you are comfortable with. Ensure that the additional risk and costs are something you can afford. Affordability: In addition to the initial purchase costs of a vacation home mortgage you need to consider if you can consistently pay the maintenance and upkeep costs, and taxes such as municipal taxes and property taxes on your vacation home Mortgage Fees: The application process for a vacation home mortgage will include associated fees and costs. Additionally, appraisal fees and closing fees may also be charged by your lender that you need to consider before proceeding. Vacation Home Mortgage Rules for Properties There are some different vacation home mortgage rules depending on the type of property. For a Type A property, what would be considered a second home, it is possible to get a first mortgage as well as second mortgage options like refinancing. The maximum loan-to-value ratio for a Type A property vacation home mortgage is 95%, meaning that it is possible to purchase a second home property with a minimum down payment of only 5%. If the property is worth more than $500,000 then the minimum down payment is 5% of the first $500,000 and 10% of any amount of the property value above $500,000. Amortization periods for Type A vacation home mortgages are typically a maximum of 25 years, although it is possible to get a maximum of 30 years. For a Type B property, those that would be considered a vacation home, you are only allowed a first mortgage and are not permitted to have a second mortgage on the property. For a Type B vacation home mortgage the maximum loan-to-value ratio is 90%, meaning that the minimum down payment is 10% of the property value. Like Type A properties, the amortization periods for Type B vacation home mortgages are typically a maximum of 25 years.

    Tips for Getting a Credit (HELOC)

    Because the burden to prove eligibility is greater on self-employed individuals, it pays to be well prepared before applying for a loan. The following should be considered before going into apply for a Self-Employed Mortgage:

    Vacation Home Mortgage Qualifications

    As with other properties there are certain rules or requirements that must be met for a vacation home mortgage. Most of the standard requirements for income and employment verification will apply for both Type A and Type B properties. Credit score assessments will also be similar with a score of 600 generally being the lowest accepted amount for Type A properties, although Type B properties will generally have a higher requirement. Bankruptcies, judgements, and recent missed payments may make you ineligible for a vacation home mortgage.

    The down payment requirements for a mortgage are a minimum of 5% for Type A properties and 10% for Type B properties, although Type A properties worth over $500,000 will require 10% for the amount valued above $500,000. Lenders may prohibit the use of non-repayable gifts from family members for the down payment of a vacation home mortgage.

    Is it harder to get a mortgage if I am self employed?

    Obtaining a Self-Employed Mortgage can be more difficult than a traditional mortgage as the borrower has to take extra steps to prove to the lender that they are capable of maintaining regular payments on their mortgage. It is possible that depending on the financial institution, that Self-Employed Mortgages are not offered at all. Where they are offered, there is also the chance that banks will significantly increase the interest rates for these loans, making them a more difficult consideration for borrowers. To give a better chance at being approved, lenders are expected to offer a large down payment, up to 20% or higher, as well.

    Another difficulty associated with Self-Employed Mortgages is the lack of a T4. A full time Employee can provide proof of income through a simple T4, however a self-employed individual must provide a stated income form, which shows the amount the potential borrower claimed to have earned, and then must provide documentation which can prove the stated amount is accurate.

    Lenders will also apply the Debt Service Ratio when considering your eligibility for a loan. This is a measurement which determines your ability to maintain regular payments on a loan after all your financial responsibilities have been considered. These include monthly bills, car loans, lines of credit, student debt and any other loans.

    If after considering these other factors the bank is confident that you are able to meet their requirements for regular payments, you will be eligible for a loan.

    Commonly Asked Questions

    For a property classified as a second home (Type A) the minimum down payment for a vacation home mortgage is 5%, although a property value greater than $500,000 will require a down payment of 10% for the value above $500,000. For a property classified as a vacation home (Type B) the minimum down payment is 10%.
    For a property classified as a second home (Type A) the minimum credit score required for a vacation home mortgage is usually 600. For a property classified as a vacation home (Type B) the minimum credit score is usually in the high 600s. The better your credit score the better the mortgage rate will be for your vacation home mortgage.
    Since vacation homes, both Type A and Type B, are considered second properties the risk is considered higher. The mortgage rates for a vacation home mortgage are typically higher than the rate for a primary residence. The larger the down payment and the better the credit score the more favourable the mortgage rate is likely to be.

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