A vacation home means something different to everyone: for some, they’re pure income opportunities, with many investors buying short-term rental properties in popular getaway spots like the Gulf Islands, Sea-to-Sky Corridor, the Sunshine Coast, or the Okanagan.
Others are shopping for second homes for the same reason people have for generations: to find a quiet place to escape the city, get back to nature and make new memories with their loved ones. And thanks to the rise of remote work, there’s a new class of vacation-property shopper: the “digital nomad” looking for a second home for reasons that blend those of investors and those looking for a second family home.
No matter your reason for buying, there are plenty of strategies you can use to make the most of your second home. Here are some tips that can help.
Second-property mortgage strategies to consider
A good place to start is with your financial advisor, who will take a detailed look at your financial position, including your investment temperament, income, age and goals, to help you ensure the price range you’re considering will fit your budget and lifestyle.
If you’re going to finance your purchase with a mortgage, the biggest choice is between fixed and variable rates. This is a particularly complex decision now, because it’s an unusual time for both borrowers and lenders.
As illustrated in a recent BlueShore article, “How to Choose Between a Fixed- and a Variable-Rate Mortgage,” the gap in rates between variable and fixed-rate mortgages is at a historically wide level, to the point where the Bank of Canada would have to raise rates in five or six 25-basis-point increments to close the gap, depending on the lender and specific mortgage a borrower chooses.
This makes variable rates more attractive from a cost standpoint. However, with inflation running at the highest levels we’ve seen since 1991, the central bank has embarked on a rate-hike cycle, and no one knows how high rates will ultimately go. That means borrowers must weigh the risk that the bank will raise rates more than expected versus the extra cost they would pay to forgo that risk if they choose a fixed-rate mortgage.
There are other factors to consider. For example, if you think you might sell before the mortgage’s five-year term is up, you’ll face a much smaller penalty for doing so with a variable-rate mortgage – typically three months’ worth of interest. Penalties for selling early on a fixed rate, however, are usually much higher.
Before moving on from mortgages, here’s a strategy that can work well for borrowers who choose variable rates: using a mortgage calculator, figure out what your monthly payment would be if you went with the current fixed rate, then set your payment at that level. That way, you’ll give yourself a buffer against rising rates and you’ll pay your mortgage down faster for as long as the gap between variable and fixed rates exists.
Short-term rentals: consider these often-overlooked costs
Will you be renting out your vacation home? If so, be sure to account for the time you’ll need to clean and care for the property between guests. If the property is a bit far away or you would rather outsource this job to a property manager, you’ll need to account for this expense when calculating your forecast return on rent, as well.
Property-management fees vary widely from provider to provider and by the amount of revenue your short-term rental generates, so before making your purchase, make sure you have a quote and are clear on the fee structure.
You’ll also have to consider insurance costs. Renting a property to vacationers is likely to involve a higher premium or even a separate insurance policy. There are some policies specifically available for a property’s short-term rental aspects or can be tied to your existing homeowner’s policy, for example. Check with your provider and make sure you have the right insurance – the consequences can be heavy if tenants damage the property and stick you with a hefty repair bill.
Finally on the cost front, bear in mind that vacation homes don’t qualify for the principal residence exception, or PRE, that shields your main home from capital-gains tax upon sale. It’s calculated by taking 50% of the gain on the sale and taxing that portion at the seller’s marginal tax rate (adding it to their income in the year the sale occurred, in other words).
Remote work: Mind the tax implications
If you’re thinking of buying a second abode in another province as a place to work, you should avoid tax issues so long as you maintain your status as a resident of BC. The Canada Revenue Agency determines residency by looking at a taxpayer’s situation on December 31 of the tax year.
If on that date you have a property in BC and one in another province, but have a closer tie to BC – say that’s where your spouse and dependents live, it’s where your home bank branch is, and it’s where you hold your health card or driver’s licence – BC would be your province of residence. You’d pay the provincial portion of your yearly income tax there.
It’s when you buy outside the country that taxes on work done remotely really come into play, particularly if you’re spending a large portion of your time there.
If the property is in a country with a tax treaty with Canada (such as the US), the owner should be able to avoid being taxed twice. But there are other rules that may cause the other country to consider you a resident (and therefore subject to income tax there) or at best could leave you with extra paperwork (and stress) to avoid that designation. Before buying, discuss your situation with a professional who is versed in international tax law.
Buying for personal use: Keeping your property safe when it’s unoccupied
If you and your family will be the only users of the property, one of your biggest challenges will be safeguarding it from intruders, wildlife or water infiltration when no one is there.
If the property will be empty for long stretches, you’ll want to inform your insurer, as many have requirements you must meet to maintain your coverage while you’re away, such as having someone check on the property at specific intervals and/or ensuring the water is turned off, pipes are drained and the heat is left on, for example.
The good news is that the smart-home trend has given us many affordable ways to monitor our property. You can buy Wi-Fi enabled cameras for a low cost, use connected water sensors to send you an alert if there’s a leak or a broken pipe, and you can install smart thermostats to monitor and adjust for temperature and humidity. You can even buy Wi-Fi enabled light bulbs, switches and plugs you can turn on and off from your phone, giving the impression someone is there.
Finally, keep an eye on government policy
In response to the housing crisis, provincial, federal and municipal governments have brought in policies that may affect your purchase. For example, BC’s speculation and vacancy tax applies an annual surcharge for homes that aren’t your principal residence and are not rented for at least six months of the year in certain cities, such as Vancouver and Kelowna.
Similar rules exist or are coming into effect in other provinces. In addition, some local bylaws may also impact what you do with and how you manage a vacation property. Keep yourself up to date on the latest policies and how they might affect you.
Your advisor can help you buy with confidence
Purchasing a vacation home can be both an exciting and complex undertaking. We can help. Your BlueShore financial advisor will work with you to ensure your dreams for a vacation home can fit into your overall financial plan – so you can stay focused on relaxing and making memories in your new getaway. Book an appointment today.
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