Second home - a good idea in many ways

Michelle Feng

November 15, 2019

Some of our clients have acquired secondary homes recently to take advantage of discounted home prices during the recent slowdown of the market. This allows them to optimize the future capital appreciation and other benefits while enjoying the convenience a second home provides.Some clients want a second home closer to their workplace or for their children who are enrolled in post-secondary education far from the family’s primary home. For many parents this is a favorable alternative to paying rent for reasons I will explain below.

On the surface, purchasing a secondary home seems like a stretched goal but what many do not realize is that subject to qualification you require as little as 5 - 10 % down payment and can obtain a mortgage at a very favorable rate.

For example, if you purchase a second home for $500K, the required minimum down payment is $25K, and you can finance the remainder of the purchase price through a traditional insured mortgage with monthly payments (principal and interest) of approximately $2,260* at today’s five year rate of 2.69% and 25-year amortization. Out of the first payment, $1,101 covers the interest and $1,159 goes towards principal reduction. In five years, the mortgage balance would be reduced to approximately $420K.

According to the latest fall market report from Canada Mortgage and Housing Corporation, BC is heading into a period of sustained moderate growth. If we use the above example of having 5% down on the $500K purchase and take for example an average capital appreciation of 5% per year, the value of your property will go up to $638K in 5 years and your equity position would increase from $25K to $218K after five years when combining the capital appreciation with the mortgage principal reduction. The required capital for you to acquire and maintain the property includes the initial down payment, property transfer tax, closing costs, ongoing mortgage payments, property tax and condo fees for a total of approximately $190K. However, with the property appreciation, you will grow your capital from $190K to $218K over the five years. In other words, the appreciation of your property value will allow you to recover all the funds you invested into the property plus gain a surplus of $28K in 5 years based on the average annual growth of 5%. As an alternative, if you were to rent over a five-year term you would spend around $110K on rent (average $2K a month).

By purchasing the property versus renting you would be ahead by approximately $138k after five years. When you weigh up the potential financial benefits and convenience of owning a second home it is an attractive option for many.

* Note: The monthly payment of $2,260 was calculated based on a gross mortgage amount of $498,750 including the original loan amount of $475,000 and one-time mortgage default insurance premium of $23,750 (i.e. 4% of $475,000).