A standard mortgage is, in principle, only for a home you'll live in yourself. Here's an overview of the differences in financing when considering a second home or an investment property.
- A standard mortgage is, in principle, financing for a home meant to be lived in by the borrower or their family.
- For a weekend-only vacation home or second home, it's common to look into a second-home loan (sekando hausu rōn) rather than a standard mortgage.
- For an investment property intended to be rented out, you'd use a different financing product, such as an apartment loan or a real estate investment loan.
- Using a standard mortgage for investment or non-residential purposes constitutes a breach of contract and carries the risk of the lender demanding immediate repayment in full.
- Second-home loans and investment property loans tend to carry higher interest rates than standard mortgages.
Conclusion: The Loan You Can Use Depends on Your Purpose
A standard mortgage is financing for a home you'll live in yourself, and it's not available, in principle, for a second home or investment property. Depending on your purpose, you'll need to look into a different product, such as a second-home loan or a real estate investment loan.
Why Standard Mortgages Are Limited to Owner-Occupied Homes
A standard mortgage is financing designed to support the acquisition of housing to live in, and it comes with tax benefits and lower interest rates as a result. Financial institutions screen and price these loans on the assumption that the borrower or their family will actually live there, so a property intended to be rented out — or otherwise used mainly for a different purpose — is, in principle, ineligible.
Where Second-Home Loans Fit In
If you're buying a vacation home or second home you'll only use on weekends or holidays, it's common to use a product called a second-home loan. Since it's not your primary residence, the rate tends to be set somewhat higher than a standard mortgage, but it can still be more favorable than an investment property loan.
Investment Properties: Apartment Loans and Real Estate Investment Loans
For a property purchased for rental-income purposes, you'd use financing products like an apartment loan or a real estate investment loan. Unlike a standard mortgage, these are screened based on the rental income the property will generate, and their rate levels and screening standards are set on a different basis, too. For cautions when buying an owner-change property for your own use, see our separate article, Cautions When Buying an Owner-Change Property for Your Own Use.
The Risk of Using a Loan Outside Its Intended Purpose
Renting out or using for investment purposes a property purchased with a standard mortgage, contrary to what was originally intended, can constitute a breach of contract. If discovered, this can lead to serious consequences, such as the lender demanding immediate repayment in full — so using a mortgage means honoring the intended use you agreed to at signing. If unavoidable circumstances, such as a job transfer, make renting the property necessary, it's important to consult your lender in advance rather than proceeding without telling them.
Thinking It Through When Considering Multiple Properties
If you're considering a second home or an investment property in addition to your primary residence, you'll need to build a financing plan that combines the appropriate loan products for each purpose. The status of your existing mortgage repayment can also affect the screening for a new loan, so it's important to consider the balance of your overall purchase budget. Since the product lineup and screening standards vary by lender, we recommend consulting multiple institutions before proceeding.
Frequently Asked Questions
Can I buy a second home with a standard mortgage?
In principle, a standard mortgage is for owner-occupied housing, so it generally can't be used for a second home. You'd need to look into a separate product called a second-home loan.
What kind of loan is used for an investment property?
For an investment property purchased for rental-income purposes, you'd use financing products, like an apartment loan or a real estate investment loan, that are screened based on rental income as the source of repayment.
Can I rent out a home I bought with a mortgage later on?
Converting it to a use not originally intended under the contract can be considered a breach of contract. If you expect to rent the property out, we recommend consulting your lender in advance.
Summary
A standard mortgage is, in principle, for owner-occupied housing, and a second home or investment property requires a different financing product. Understand the differences between loan types depending on your purpose, and build your financing plan while avoiding the risk of using a loan outside its intended purpose.