Financing a Vacation Home or Cottage: How to Make Your Dream a Reality
Most Canadian families and digital nomads are finding that their values and lifestyles are evolving and they are seeing their cottage dreams as more accessible than ever before - but how realistic is it? Purchasing a summer cottage or vacation home is one way that families are choosing to live differently and it’s more accessible than you think with the proper planning.
There are many reasons why this option is becoming more popular.
For some, it provides a convenient and affordable way to get away for the weekend or on vacation. Others find that it is a good way to decrease their weekly commute. And, for those with children who are heading off to university, it can be a great option for retiring early. More people are also seeing the value of slowing down in nature and escaping the busy city life.
Whatever the reason, there are many Canadians who are considering this option. It is also important to note that it is possible to finance a second property with the same low interest rates as owner-occupied properties.
Two Types of Vacation Homes/Cottages
TYPE A
For a rustic getaway that you can enjoy all year round, Type A cottage may be the perfect option for you.
These cottages must meet certain requirements in order to be eligible for financing, but the payoff is a beautiful and cozy home that you can enjoy for many years to come:
Must be built in such a way that the borrower or a relative can live there rent-free at some point during the year. Must have four-season access and be ready for winter living, with running water, central heating, plumbing, and electricity. Must have a permanent foundation below the frost line. Properties that float are possible, but rental pool/timeshare properties are not eligible. The property should be easy to sell in case you ever decide to move on from your little slice of heaven. Lenders are more conservative on this than you and I are so make sure to pass this by your mortgage advisor!
TYPE B
For a seasonal getaway that's a little off the beaten path, a Type B cottage might be an option to consider.
These cottages are typically only accessible by boat or seasonal roads, and they offer a rustic escape from the hustle and bustle of everyday life:
Type B cottages must have certain amenities like kitchens and bedrooms, they don't need a permanent heat source. Type B cottages can be built on concrete blocks or pilings, making them easier to construct in remote locations. Have at least 850 square feet of space and you must be typically willing to pay a 50 percent down payment. Can only be used for a part-time living - they must be available for rent-free use by the borrower or a relative at some point during the year.
Mortgage Financing
In addition to the usual property requirements, you must also be able to personally qualify for a mortgage. Because cottages are typically not 'owner occupied' year-round, interest rates and minimum down payment requirements on cottage mortgages might be slightly higher than on traditional mortgages.
Additionally, many lenders will require that the property be insured with CMHC or Genworth insurance. However, it is possible to get conventional financing for quality properties.
Type A cottages can be mortgaged as a 'second home', similar to how you would mortgage your primary residence. When it comes to refinancing, Type A cottages have more options available, as long as there is 20% equity remaining in the property. Type B cottages, you'll need to make a minimum down payment of 10% and the loan amount cannot typically exceed $350,000. Refinancing options are also generally limited with Type B cottages.
Key caveat: Most lenders will NOT finance you if this cottage property is your only home. They still cannot wrap their heads around people working remotely in cabins so you need a good mortgage team to know which lender to go to and what story to spin.
Your Home Equity Can Help Finance Your Dream Second Home
For many people in Canada, their home is their most valuable asset. As such, it can be a great source of funding for things like a downpayment on a cottage. With home equity loans, you can borrow up to 80% of the value of your home, which can be a great way to finance your dream vacation property. Refinancing You can pull out home equity firstly through refinancing which means, switching your main mortgage to another lender and taking out equity at the same time.
If you do not want to change lenders or break your mortgage, some lenders offer a HELOC which acts as a revolving line of credit on your existing property. Home Equity Line of Credit (HELOC)
Home equity lines of credit, or HELOCs, are a popular way to finance your second home. They work like this: you borrow money against the equity in your home and make monthly payments just like you would with any other loan.
The big advantage of a HELOC is that you only have to pay the interest on the loan for as long as you have it. That means if you get a HELOC with a 10-year term, you can pay it off anytime in those 10 years without any penalty. And, as you pay it down, that credit becomes available to you again
The downside of HELOCs is that they usually have a higher interest rate than regular mortgages. For example, if you have a mortgage with a current interest rate of 2.89%, your HELOC might have an interest rate of 4.45%. That means it can be expensive if you don’t pay down the principal of the loan quickly.
But if you do pay it down quickly, a HELOC can be a great way to finance a vacation home or cottage without having to put up any additional collateral.
Mortgage Refinancing vs HELOC’s
Considering a HELOC or mortgage refinance to fund your cottage? Here are some things to think about.
With a HELOC, you're only paying interest on the money you've borrowed, which can save you money in the short term. However, this means that the underlying debt remains unpaid. In contrast, a mortgage requires you to pay down the principal and interest, which can add up over time but may save you money in the long run. Downpayment
The minimum down payment for a non-insured property purchase varies by lender, but it's typically 20-40%. Some lenders do only 10% down payment depending on where you finance it. If you're taking out an insured mortgage, there may be restrictions on the maximum loan amount depending on the location and access.
Many borrowers prefer to refinance their existing primary residence and pay cash for the second home, as it's often easier. You can also get a draw/construction mortgage, which is available for unserviced land.
For prime locations, you might be able to get financing with a 25% down payment. It's important to note that cottages and 2nd homes can't be used for investment purposes or as a rental. Under this program, lenders won't accept rental pools or timeshares.
Interest Rates on Cottage Properties
If you're thinking of purchasing a cottage, you'll be glad to know that interest rates on owner-occupied cottages are usually the same as on residential mortgages. The only exception is if you intend to rent out the property, in which case rates will be higher by ~0.15%.
THE BOTTOM LINE
There are a number of ways to finance your dream vacation home or cottage. Talk to your mortgage broker or lender to see what options are available to you and find the best solution for your needs. With careful planning and a bit of luck, you could be enjoying your very own slice of paradise in no time.
Level Up Mortgages makes it easier for new buyers, newcomers, and even the self-employed to find the funding they need. If you are looking for private lending in Canada, get in touch with us today!
Do you want to learn more about mortgage financing in Canada? Level Up Mortgages supports homebuyers and homeowners in attaining success in their mortgage journey with mortgage strategy, digital mortgage education, and introductions to all the other experts you need to succeed in home buying and your personal finance. To assist homebuyers and homeowners in purchasing or refinancing new homes, we work with premier banks and best-rate mortgage lenders in British Columbia and Ontario. Get in touch with us today!