Ability to Repay/Capacity:

The ability to repay must be justified in your loan package. Banks want to see two sources of repayment - cash flow from business, plus a secondary source such as collateral. In order to analyse cash flow of business, lender will review business's past financial statements. Generally, banks feel most comfortable dealing with a business that has been in existence for a number of years because they have a financial track record. If business has consistently made a profit and that profit can cover payment of additional debt, then it is likely that loan will be approved. If however, business has been operating marginally and now has a new opportunity to grow or if that business is a start-up, then it is necessary to prepare a thorough loan package with detailed explanation addressing how business will be able to repay loan.

Credit History:

Kevin Onizuk is a partner in Breakwater Mortgage and has been in lending business since mid-nineties. In this interview, he details how to pre-qualify for a second mortgage.

Q.What is first factor a consumer should consider before deciding to purchase a second home?

A.The first question to ask yourself is can you actually afford it? The lender will want buyer to have a high enough income each month to pay for both primary and secondary housing payments. The lender will also expect buyer to have cash in reserve. Normally three to six months times mortgage is expected to be in savings as insurance against any emergencies or economic hardships.

Q.What is difference between purchasing a primary residence and a second home?

A.When buying a second home for personal or investment purposes financial picture is slightly altered. The lender will require a larger down payment because they believe a loan on a second home is a higher risk. Lenders feel it is easier for buyers to walk away from a vacation home or rental property than it is from primary residence. Since lenders believe second homes do not foster same amount of owner commitment loans are considered more of a gamble.

Q.Does owning a second home offer any tax advantages?

A.Tax deductibility can be tricky. Always consult your tax advisor. Mortgage interest and real estate taxes are usually deductible, but you must live in your second property for part of year. If you choose to rent all rental income must be reported. Remember, any money spent to maintain properties are deductible. In summary, property taxes, mortgage interest, insurance, repairs, utilities, cleaning and upkeep are all expenses. Keep careful records of all money spent on these types of endeavors.

Q.Are there any benefits to getting a home equity loan?