Are you looking to set down roots away from home in your retirement years? Or are you looking to invest in a property outside of Canada that you can use from time to time? Buying a vacation home has long been a popular way for seniors to ensure they have a place to go either when the long Canadian winter sets in or a space that they can visit routinely with their extended families. Among some of the most popular destinations for snowbirds are Florida, Costa Rica, Panama, Hawaii, Mexico and Cuba.
With real estate prices in places such as Florida still affordable for many Canadians – even with a 78-cent loonie – demand for vacation homes is still strong. If you’ve been reading the Toronto Star, you’ve likely seen those one page ads on how to get a property for less than $200,000. This affordability, combined with the climate and lack of state income tax for individuals, is attracting both seniors and young buyers.
Buying a vacation home, however, is very different than buying a primary residence. While purchasing out of country can help better protect yourself in the event of a market correction in Canada, you still have to find the means to pay for your second home.
Here are some ways you can finance a vacation property:
Take Out a Home Equity Line or Unsecured Line of Credit
A Home Equity Line of Credit – or HELOC for short – works much like the same way as refinancing your mortgage to buy an income property. Buyers can currently get a HELOC for as low as 3.20 per cent. If you are purchasing a home in Florida, for example, this can circumvent dealing with a U.S. mortgage lender. It’s a similar process if you take out an unsecured line of credit – something that is doable if you’re a renter or new homebuyer who hasn’t yet built up enough equity in your current home. But because it isn’t backed by a large asset, you will likely pay a higher interest rate.
Deal with a Local Mortgage Lender
Buyers also have the option of working with a mortgage lender in the country where the vacation home is located. However, this can be extremely costly. Once again using Florida as an example, Canadians are allowed to obtain a U.S. mortgage but American banks often don’t count Canadian credit history.
The best option is to deal with a Canadian bank who has branches in the area where you’d like to buy– something that’s an option in both the U.S. and the Caribbean. By signing up for a mortgage with a Canadian bank with international ties, you can likely obtain a much lower rate.
The reason that Canadians can’t take out a mortgage on a vacation home outside Canada through their local institution (if they don’t have branches abroad) is because Canadian lenders have no legal jurisdiction outside of Canada. Should you be unable to make your mortgage payments, a Canadian bank can’t do anything and is barred from repossessing the home.
Keep in mind that there may be some countries that do not allow financing at all, or there may be restrictions on foreign property ownership.
Purchase with a Friend or Family Member
This is a great way to lower the costs for the buyer. Find out if friends, family members or anyone else you know is looking to buy a vacation home. Co-ownership means you split the costs and take turns using the property. However, this has to be someone you can trust on all levels – especially when it comes to how they spend or save their money. It’s also a good idea to draft a written contract that states how responsibilities will be divided, and what should happen if one owner uses it more than the other or if one party wants to sell the property.
What Other Fees do I Need to Watch Out for?
One of the biggest costs outside of your mortgage is tax. Prior to beginning your search for your dream home away from home, make sure you are aware of all vacation home tax rules – which differ according to country or state if it’s in the U.S. Those tax rules get more complicated if you plan on renting out the property when you’re not using it.
Other expenses to include are home insurance, necessary renovations, utilities, Internet, maintenance costs and furniture. You may also have to pay a moving company or any other service that will be an essential part of setting up your vacation home. And you will also need to make sure that the property is safe and secure when it’s unoccupied to try to prevent break-ins or vandalism.
Purchasing a vacation home is an expensive commitment, but it can also fulfill lifelong dreams and be the perfect setting for your retirement. Ensure careful planning and budgeting and do your research, and you and your family will likely be able to enjoy it for decades to come.