You can use the equity in your current home through refinancing, home equity loan, HELOC to help finance a second property. Lenders will look at your income, credit profile, existing mortgage, debt-to-income ratio, and intended use of the second property for qualification. Consult a professional to make sure you can afford the combined payments and taxes.
If you have owned your home for several years, you might have more equity than you realize. Many Canadians use that equity to help finance an investment, vacation home, or to help a family member enter the market.
In this guide, you will learn how to calculate and access your home equity if you want to purchase a second home.
What Is Home Equity?
Home equity is the difference between your home’s current market value and the total amount you still owe on any loans secured by the property, such as your mortgage. If a home is worth $900,000 and the owner owes $400,000, the owner has $500,000 in home equity. Over time, your home equity could go up if the property’s value rises, or as you pay down your mortgage and any other loans.
Federally regulated lenders limit how much you can borrow to 80% of your home’s appraised value in total, whether that is one mortgage or a mortgage plus a HELOC.
Ways to Use Home Equity to Buy a Second Home
Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of credit secured against a home, where you may borrow up to 65% of your home’s value, and draw funds as needed and only pay interest on the amount drawn.
As stated above, homeowners can borrow up to 80% of their home value through a combined mortgage and HELOC. And any borrowing above 65% must be paid down on a set schedule and cannot be re-advanced.
Mortgage Refinancing
Mortgage refinancing means replacing your current mortgage with a larger one, and lenders will typically pay you the difference in cash. The same 80% legal LTV ceiling applies here.
Before going ahead, ask your current lender whether breaking your mortgage early triggers a prepayment penalty, which can cost several thousand dollars, depending on your rate and how much time is left on your term.
Home Equity Loan (Second Mortgage)
A home equity loan is a separate loan registered behind your existing mortgage, typically at a fixed rate. It falls under the 80% limit.
Can You Qualify to Buy a Second Home?
A lender will look at your full financial picture to decide if you qualify.
CMHC requires a minimum credit score of 600, though lenders may set higher internal requirements. A borrower’s Gross Debt Service (GDS) ratio cannot exceed 39%, and the Total Debt Service (TDS) ratio cannot exceed 44%.
Your existing mortgage payment is included in the TDS calculation, so a second property adds to debt you already carry. Every applicant must also qualify under the mortgage stress test, at the higher of your contract rate plus 2%, or 5.25%.
How much you need for a down payment depends on how you will use the second property.
| Second property use | Minimum down payment | Insured financing available |
| Owner-occupied (vacation home, or home for a related family member) | 5% on the first $500,000, 10% on the remainder, up to a $1.5 million price cap | CMHC-insured financing may allow an additional owner-occupied property (such as a vacation home or family residence), subject to strict eligibility rules |
| Non-owner-occupied investment or rental property | 20% minimum for a single-unit property | Not for a single unit, a separate CMHC-insured product exists for 2-to-4-unit non-owner-occupied rental properties |
Taxes and Closing Costs You Should Know
Land Transfer Tax
Ontario’s land transfer tax is calculated on a marginal basis.
| Portion of purchase price | Rate |
| Up to and including $55,000 | 0.5% |
| Amounts exceeding $55,000, up to and including $250,000 | 1.0% |
| Amounts exceeding $250,000, up to and including $400,000 | 1.5% |
| Amounts exceeding $400,000 | 2.0% |
| Amounts exceeding $2,000,000 (where land contains one or two single family residences) | 2.5% |
Please note, if you or your partner already own a home, you do not qualify for the first-time homebuyer LTT refund.
GST, HST and PST
Newly built or substantially renovated homes are subject to GST or HST across Canada. Resale homes are generally exempt from GST/HST. Newly built or substantially renovated homes are taxable.
Provincial sales tax generally does not apply to the purchase price of real estate itself. However, PST applies to the mortgage default insurance premiums in Ontario, Quebec, and Saskatchewan.
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Ongoing Tax Obligations
Property tax is charged every year and set by your local municipality. Confirm the exact current rate with a professional, since it is updated yearly.
Capital gains tax applies when you sell. Canada currently taxes half of any capital gain, known as the 50% inclusion rate.
The principal residence exemption means only one property per family can be designated as a principal residence in a given year. If your main home already carries the designation, capitals gains on a second property may be taxable because it generally does not qualify for the principal residence exemption.
If you rent the property out, that income must be reported annually. Should you switch from long-term rental to a short-term platform and provide substantial services like cleaning or meals, the CRA may treat that as business income.
This section is general information, not tax advice, so confirm all figures with a qualified accountant before relying on them for your own return.
H2: Costs Beyond the Purchase Price of a Second Home
| Cost | Typical range |
| Legal fees | Part of closing costs (see below) |
| Home inspection | Around $500 (varies by property size) |
| Appraisal fee | $250 to $350 |
| Mortgage default insurance | Applies under 20% down, and is added to the mortgage |
| Closing costs overall | 1.5% to 4% of purchase price |
| Maintenance and carrying costs | Property tax, utilities, insurance, condo fees, seasonal upkeep |
Common Mistakes to Avoid When Using Home Equity
- Borrowing more than you can comfortably repay. A HELOC’s interest-only minimum payment lets you draw the full amount without reducing principal.
- Underestimating taxes and closing costs.
- Not planning for rate increases on a variable HELOC or at mortgage renewal.
- Overlooking the cash flow needed to carry two properties at once.
- Skipping advice from a mortgage broker, accountant, and real estate lawyer, since each one identifies different risks.
Is Buying a Second Home Using Equity Right for You?
Some buyers want a vacation home or a home for their children or parents, others want rental income, and many see it as a long-term investment. Keep in mind a second property means two mortgages, and your money tied to the real estate market twice over. Speaking with a mortgage professional can help you evaluate whether this strategy suits your financial situation.
A vacation home may qualify for CMHC’s minimum down payment of 5% to 10% if the property is suitable for full-time, year-round living. For an investment property there’s a 20% minimum down payment, and rental income is taxed every year you hold the property.
Buying for a family member comes with a specific rule. A related person may live there rent-free while you still qualify for owner-occupied financing, which is useful if you are buying for a parent or an adult child. If you’re looking for a second home right now, we have homes for sale across Brampton.
Frequently Asked Questions
Can I use my home equity as a down payment for a second home?
How much equity do I need to buy a second home?
Can I use a HELOC to buy an investment property?
Do I pay HST or GST when buying a second home?
Will buying a second home affect my mortgage?
Can I avoid capital gains tax on a second property?
Can I refinance my home to buy an investment property?
Conclusion
Home equity (through HELOC, refinance, or home equity loan) can fund a second property, but only if you can afford two mortgages, closing costs, and taxes. Review your finances and consult a mortgage professional before deciding. If you’re ready to explore second homes in Brampton, we’re here to help.
Sources
- CMHC
- CMHC
- CMHC
- Government of Ontario: Calculating land transfer tax
- Government of Canada: Principal residence other real estate
- CMHC
- CMHC
Disclaimer: The information provided in this article is for general informational and educational purposes only and should not be considered financial, mortgage, legal, tax, or investment advice. Mortgage qualification requirements, lending policies, interest rates, tax rules, and government programs may change and vary based on your individual circumstances. While every effort has been made to ensure the accuracy of the information at the time of publication, no guarantee is made that it is complete, current, or applicable to your situation. Always consult a qualified mortgage professional, financial advisor, accountant, or lawyer before making decisions about using home equity or purchasing a second property.
