After buying a home, cottage ownership is traditionally high on the wish lists of Canadian families. In fact, many of us dream of a weekend retreat to escape the hectic city, make memories with our kids or enjoy a peaceful retirement.
The COVID pandemic initiated higher demand and today, cottages have been more popular than ever. This sector has seen very brisk sales activity and significant price growth in the last 2 years.
Whether the desire is long standing or new in your life, it’s always good idea to consider the financial implications related to cottage ownership. Before you start driving along those country roads looking for ‘for sale’ signs, you should consider what financial options are involved in owning a cottage property.
For our clients that have been asking about this opportunity, the most popular question has been: how do I finance a cottage purchase?
Cottage Financing How-To
For the purpose of this article, we should mention that we are referring to cottage purchases for personal use, NOT for investment or rental pools. Any property for investment purposes always dictates a minimum 20% down payment, so you cannot buy a cottage with the sol intent to rent it and expect to put any less than 20% down. For this post, we are going to stick to financing tips for personal-use cottage properties.
There are essentially three ways to finance a personal cottage purchase:
- by financing the cottage itself, or
- by using your home equity to purchase a cottage in cash, or
- by using a combination of both (home equity + financing)
Cottage financing with 5-10% down payment
A cottage purchase can be financed with as little as 5% down payment (subject to default insurance through CMHC, Genworth or Canada Guaranty). To be eligible for a 95% mortgage on a cottage property, it must essentially have all features of a regular home.
The down payment requirement increases to 10% when certain features render it not a full regular home. Examples of this may include but are not limited to: property is not winterized, seasonal access only, lake intake water source, no permanent heating source, foundation on blocks.
Leverage existing home equity to purchase cottage with cash
Your primary residence is another good place to look for financing for a cottage. For example, if you’ve built up some equity in your home, you may be able to utilize that available equity to achieve your goals.
With the local real estate market in a high-demand state, you may be surprised with a new assessment of your primary residence. If your home is worth $500,000 and your mortgage is lower than $200,000 you should be able to liquidate a significant portion of that equity into capital for your purchase.
The advantage to consider with this approach is that some cottage properties – depending on property details and services – can translate to higher interest rates than urban properties. In this financing solution, you can use your current rate structure to leverage the equity you need to make a cottage dream happen at a financial structure that you know already works for you.
Combination approach
Of course you don’t need to pick one of the above options entirely – there is a third option that allows you to leverage the equity you’ve built in your home and if that doesn’t cover the full amount of the loan, you can finance the difference. In this scenario, you have the ability to build a custom financial solution that works for your individual cash flow needs.
Local Hot Market Considerations
Increased demand
Among the unexpected outcomes of this pandemic is an increased demand in cottage ownership. Some individuals are looking to retire early and move out of the city on a more permanent basis, others are excited that working remotely doesn’t have to mean working from an urban center anymore. In addition to workplace changes – international travel is at an all-time low and more attention has been focused on staying close to home and travelling locally. All of these factors and more are turning heads towards country properties that offer more space and simply, another place to spend time over the primary residence.
Variety of Properties
Like any property purchase – there are a variety of options available in the Ontario cottage market. From land to with structure, rustic to comfort, waterfront or not – the listings carry a spectrum of cottage experiences that appeal to a range of buyers. Cottage Life recently analyzed four of the most popular cottage areas in the province – click here to explore the pricing guide that is offered for these locations and remember that there are secret sanctuaries off the beaten path as well.
The Right Realtor
With more than two decades in the local mortgage business, we’ve built an impressive roster of industry contacts with Ottawa’s top realtors. Remember that our team is always here to connect you with the right professional who can provide the best advice for one of the most important purchases in your life.
We hope you have found this information helpful to start you on your cottage purchase adventure. If you have any questions about financing a second property or using equity that you’ve built on your home – don’t hesitate to reach out to our team. We’re seasoned specialists who can pretty quickly analyze the opportunity on your behalf and let you know what kind of capital you have to work with. That’s when you can start browsing MLS or looking at ‘cottage for sale’ signs with the wisdom you need to be able to make cottage dreams happen for your family.