*This post was created in collaboration with Alpine Credits
Thinking of buying a second home in Canada but don’t have liquid cash available for a down payment? Then consider tapping into your current home’s equity. If you’re already a homeowner, you may have enough equity in your home to use to buy another property.
Let’s look a bit further into using home equity to buy another home in Canada.
Key Points
- If you own a home and have enough equity, you may be able to borrow against it to buy another home.
- Home equity loans, HELOCs, and reverse mortgages are some loan products you may apply for to access your home’s equity.
- In most cases, you’ll need at least 20% equity in your home to qualify for an equity loan.
Can You Use Your Home Equity To Buy Another Home in Canada?
If you have a certain amount of equity built up in your home, you can use some of it to put towards the purchase of a second home.
In Canada, you can borrow up to 80% of your home’s appraised value, less the remaining balance on your first mortgage. The exact amount you can borrow from your home’s equity depends on the lender and loan product you choose.
You can then use that money to cover some of the cost of a second home purchase.
Can I Use Borrowed Funds For A Down Payment?
As mentioned above, some lenders may allow borrowed funds to be used for a down payment on a second home purchase, but many will not.
For those lenders that do allow borrowed money for a down payment, you’ll need to pass their minimum requirements, including having a high income, credit score, and positive payment history. You may also have to come up with 5% of your down payment on your own, and then borrow the remainder of your down payment.
It’s also important to understand the rules when it comes to borrowing for a down payment for an insured mortgage.
Borrowed Down Payment Rules For Insured Mortgages
There are three mortgage default insurers in Canada: CHMC, Sagen, and Canada Guaranty. While CHMC is a crown corporation, Sagen and Canada Guaranty are private insurers.
- Canada Mortgage and Housing Corporation (CMHC) does not allow borrowed down payment funds for insured mortgages
- Sagen allows qualifying buyers to borrow money for a down payment
- Canada Guaranty also allows borrowed funds for down payments on insured mortgages
Ways To Use Your Home Equity To Buy Another Home In Canada
There are a few different ways to access your home equity to buy a second home, including the following:
Home Equity Loans
Also referred to as a “second mortgage“, a home equity loan is a type of loan that allows you to borrow up to 80% of the current market value of your home, less the outstanding mortgage balance. Like a traditional loan, you’ll be given a lump sum of money. Then, you’ll repay the loan in installment payments over a specific term with interest.
These loans are secured against your home. That means, if you’re unable to repay the loan, the lender can seize your home. So, be sure you can afford the payments before you apply.
Home Equity Lines Of Credit (HELOCs)
A HELOC is a type of revolving credit you can use to borrow money against your home’s equity. Once you repay what you’ve withdrawn, you can borrow over and over again up to a maximum credit limit. With a HELOC, you can borrow up to 65% to 80% of your home’s appraised value.
A unique feature of a HELOC compared to other equity loans is that you don’t have to repay the principal until the draw period is over. Only interest payments are required on the withdrawn funds, and not on the full credit limit. Until the draw period is over, you simply need to make the minimum payments.
Reverse Mortgages
A reverse mortgage is another type of loan that lets you use your home’s equity. With a reverse mortgage, you can convert up to 55% of your home’s appraised value into cash that you can use for various purposes, including contributing money towards a second home purchase.
You must be at least 55 years old to qualify for a reverse mortgage.
Cash-Out Refinances
A cash-out refinance lets you access your home’s equity and convert it to liquid cash. If you have at least 20% equity in your home, you can refinance your home for more than what you still owe on your mortgage. Then, you can take the difference in cash and use it for just about anything, including buying another property.
How Can You Tap Into Your Home Equity?
While you can apply for a home equity loan with a bank, you can also access your equity through alternative lenders like Alpine Credits. These lenders can be an optimal choice for those who have bad credit, as they simply approve you based on your equity, not your credit or income.
If you’re looking to tap into your home equity, consider Alpine Credits.
Can You Use A Personal Loan To Buy Another House?
Personal loans are financial products that provide a lump sum of cash to borrowers and are repaid over a specific loan term via installment payments. Most personal loan amounts range from $500 to $35,000, and sometimes more depending on the lender.
Loan terms typically range between 6 and 60 months. The interest rate you’re charged depends on your financial strength, debt, and credit score. So, be sure to check your credit score before applying, which you can do for free using Loans Canada’s CompareHub tool.
Should You Use A Personal Loan For A Second Home Purchase?
Personal loans offer flexibility when it comes to how funds may be used. As such, you could use money from a personal loan to put towards the purchase of another home.
Keep in mind, however, that you’ll likely pay a higher interest rate compared to a home equity loan or HELOC. Thus, a personal loan can be much more expensive. That said, an unsecured personal loan does not put your home at risk, which is the case with a home equity loan or HELOC.
How To Use Your Home Equity To Buy Another Home In Canada
To use the equity in your home to purchase another property in Canada, follow these steps:
Step 1. Calculate Your Home Equity
To find out how much equity you have in your home, subtract your outstanding mortgage balance from your home’s current market value. For instance, if you still have $400,000 left on your mortgage and your home is currently valued at $900,000, that means you have $500,000 in equity ($900,000 – $400,000).
Step 2. Have Your Home Appraised
A professional appraiser will accurately estimate the value of your home. This figure will help you determine the maximum amount you can borrow against the equity in your home.
Step 3. Do Some Lender Comparison Shopping
Before applying for your loan of choice, consider doing some online comparison shopping to find lenders in Canada that offer these loans. You can use an online loan aggregator to compare lenders and their products side-by-side to see where you can get the best deal.
Step 4. Check Your Eligibility
Every lender has their own specific criteria for home equity loans. That said, some of the more common requirements include:
- Minimum credit score
- Proof of reliable income and stable employment
- Maximum debt-to-income ratio
Be sure to understand what the eligibility criteria are and find out if you meet them before you apply for a home equity loan with a specific lender.
Step 5. Apply To Access Your Home’s Equity
Decide whether you want to take out a HELOC or home equity loan. Then, apply for the loan with the lender of your choice.
As previously mentioned, you can apply with most major banks and credit unions. However, if you have bad credit, you can apply with alternative lenders like Alpine Credits.
Step 6. Access The Funds
Once you’re approved for your loan, you can tap into the equity in your home and use the funds to buy another property. However, do note that some lenders may have restrictions on using borrowed funds as a down payment. So be sure to understand the conditions before tapping into your home equity.
Step 7. Make Payments
Once you receive the funds from your loan, you’ll need to start making payments to repay the funds. In the meantime, you’ll continue making payments on your first mortgage. Consider creating a workable budget to ensure you can keep up with additional loan payments.
Benefits Of Using Your Home Equity To Buy Another Home In Canada
Using your home’s equity to buy another property comes with a few perks, including the following:
Equity Appreciation
Over time, real estate appreciates in value, even with the odd dip here and there. And every mortgage payment you make adds to your home’s equity. At some point, you may have enough equity built up in your second home to buy a third property.
Leveraging your home’s equity to invest in real estate means you’ll be adding more valuable assets to your portfolio that generate value over time and help you build sustainable wealth.
Generate Income Through Rent
While you can use your home’s equity to buy a vacation home for yourself to use, you can also purchase an investment property. Renting out your second property can generate monthly income that will cover the home’s mortgage and carrying costs. Meanwhile, the second property will appreciate in value over time, much like your primary residence.
Alternatively, you may choose to purchase a second property that you can use both as a recreational home for yourself and to rent out during times of the year when you’re not using it. The rent you charge for short-term rentals can help cover the costs of the mortgage and operational expenses.
Avoid Mortgage Default Insurance
If you buy a second home with less than a 20% down payment, you’ll need to pay into mortgage default insurance, otherwise known as CMHC insurance. This will add to the cost of your mortgage. The exact premium you pay on top of your loan depends on the amount of your down payment, though it can range from 0.60% to 4.0% of the total amount borrowed.
Borrowing money for the purpose of bringing your down payment to 20% or more might be worth considering. In some cases, it might make financial sense to borrow money for a down payment on a new home to reduce the costs – or avoid altogether – CMHC insurance premiums.
Bottom Line
Homeownership comes with a slew of perks, including having access to equity that you can leverage to buy additional properties. With either a home equity loan or HELOC, you can tap into your home’s equity and use the money to put towards a second home purchase. And by continuing to accumulate equity in real estate, you can build a healthy investment portfolio.
FAQs On Using Your Home Equity To Buy Another Home in Canada
Can I use money from a home equity loan as a down payment on a second property?
How much money can I get when I take out a home equity loan?
Are there any risks to using a home equity loan to purchase a second home?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
