Advice for Buying a Vacation Home
Tuesday, July 22, 2014
If you've discovered that perfect Canadian holiday destination and can't imagine ever spending your free time anywhere else, you may consider buying a vacation home. Following are some considerations before you lay out your hard-earned savings:
- The top spots for vacation homes are the greater Vancouver area, Whistler, Muskoka, Kelowna, and in the East, the west coast of Newfoundland and St. Andrews by the Sea (Sherman, 2008). But there are so many rivers and lakes in Western Canada for water sports and swimming that you are spoiled for choice. The national parks also provide incredible opportunities for hiking, cycling and horseback riding. The choice is yours.
- Canadian lenders can be picky when approached for loans for vacation properties, probably because infrequently occupied and seasonal homes can easily fall into disrepair. You may have to do some fast talking to convince them that it is a second home that will be occupied frequently (The Globe and Mail, 2012).
- Depending on your financial circumstances, your lender will require that you pay some percentage of your vacation home upfront. This is usually 20 per cent, but can be as low as five per cent for financially sound families who buy a house that will be occupied frequently (Verico Equity Plus Mortgages, 2014). If you have some equity available on the mortgage for your primary home, or if you have some other savings, you might manage that.
- Unlike your primary home, your second home is subject to capital gains tax (Johne, 2012). Include this when calculating whether it is financially feasible. One option is to transfer ownership to one of your children so your death will not trigger this tax.
- Rental income is considered business income. So if you rent out your vacation home, some of your mortgage interest, maintenance costs and renovations become tax deductible (Johne, 2012).
- On the downside, rental income is taxable income, and you will have to pay for the insurance and maintenance of two homes.
- As with your primary home, hire professional home inspectors to examine the property for defects. This is even more important for a vacation home, since proper maintenance of a second home might be a financial burden that many families cannot bear.
Some of your families' best memories can be made in your vacation home. Consider the advantages and disadvantages carefully beforehand so it does not become a burden.