Spring and Summer are on the way, which means warm weather and good times spent with friends and family. What better way to spend the coming months than at your very own cottage?
Like many other Ontarians, the thought of owning a cottage has no doubt crossed your mind at one time or another. A cottage is more than just a place to go vacationing. It’s like a second home — a place where you can create lasting memories that extend from one generation to another. Without being certain if or how you can afford to buy a cottage, summers spent fishing at the lake or swimming with your children might feel like just a dream. Well I’m here to tell you that there are attainable financing options available to help you turn that dream into reality.
First you have to understand the difference between the two different types of cottages, which mortgage lenders call Type A and Type B. Then I’ll discuss a couple of different ways you can mortgage your dream cottage, depending on the type you’re looking for. In the end, I trust you’ll feel much more confident about being able to afford the cottage you’ve always wanted.
The Two Types of Cottages
We all know that cottages, like houses, come in many different forms. You can certainly argue there are more than two types — but in the eyes of mortgage lenders there is essentially Type A and Type B. Let me explain the difference between them.
Type A Cottage: Second Home
This type of cottage is built for year-round access. With a permanent heating source, it can be inhabited during all seasons. This also means it’s equipped with potable running water, and built on a permanent foundation below the frost line. You may also hear this referred to as a “winterized” cottage.
Financing Type A Properties
Since Type A cottages are treated as second homes by mortgage lenders and insurers, they can be mortgaged similar to how one would mortgage a permanent residence. That means a minimum 5% down payment, fixed and variable terms with eligibility to refinance once equity has built up. Interest rates for a Type A cottage might be 0.10-0.20% higher than a regular mortgage because it’s not intended to be owner occupied year-round. If you can’t afford more than a 20% down payment, an insurer’s premium must be added, similar to a standard mortgage. It’s important to keep in mind that financing a second home is considered somewhat of a risky transaction. The thought is that if borrowers can’t afford to make payments, they will prioritize their primary residence and second homes are therefore more vulnerable to default.
To offset the risk, maximum mortgage amounts for second homes are capped at lower levels, which usually vary between $600,000 to $700,000. This also depends on the property’s location and overall loan-to-value. Credit score standards are also raised, but not to a level that would shut out borrowers with average credit. Since Type A cottages can be marketed as either first or second homes, they are considered ‘prime’. This means you can borrow up to 95% of a Type A property’s value on a purchase (or up to 90% for refinance), and your maximum amortization can be as high as 25 years.
Type B Cottage: Vacation Home
Not quite a “second home”, a Type B cottage more adequately fits the definition of a “vacation home”. It is built for seasonal access, which means no permanent heat source. Rather than being built on a permanent foundation, a Type B cottage is built on a floating foundation such as concrete rocks or pilings. Type B properties are still required to have indoor plumbing.
Financing Type B Properties
Mortgages for Type B cottages require a minimum 10% down payment, also with fixed and variable terms. The maximum value of a Type B cottage cannot exceed $350,000. Like Type A cottages, interest rates are 0.10-0.20% higher than standard fixed rate mortgages. An insurer’s premium must also be added if the down payment is less than 20%. Since Type B properties are considered less marketable, coupled with the fact that they can be left unattended for extended periods, the increased risks are offset by scaled-back lending policies. That means you can borrow up to 90% of a Type B property’s value on a purchase. In addition, your maximum amortization period is also 25 years.
Other Financing Options for Your Cottage
Now that you have a better understanding of the two types of cottages, and the financing options available for each, let’s discuss one more financing option that’s applicable to both types.
Refinancing Your Home
If your credit is good, the easiest solution for many aspiring cottage owners is to refinance a primary residence. You can use the equity to either purchase a cottage outright, or make a large enough down payment (35% or greater) that a mortgage lender will do the deal simply based on the amount of equity.
Did you know up to 80% of the value of your home can be refinanced? Let’s say you have a home worth $300,000 and only hold a mortgage of $150,000 — that means you can refinance to take out the equity up to $240,000 and use the $90,000 to put a down payment on a cottage.
Where to Buy Your Second Home or Vacation Property
Now that you have an idea of what type of cottage you’re in the market for, and how you will go about financing it, I will leave you with some final considerations for where you should purchase it.
Where you should purchase your cottage should be determined based on a combination of budget and proximity to your primary residence. Here is locations for waterfront recreational property values around Sudbury & Greater Sudbury areas.
Hagar / Markstay – $226,250
Espanola – $228,000
French River – $197,000
Manitoulin Island – $151,000
Nipissing – $191,000
Broder Sudbury – $420,000
The Valley – $217,500
Walden – $332,500
Massey / Webbwood – $224,250
*average waterfront cottage / recreational sale price for 2016 based on MLS Board statistics
This is a matter of personal preference, but in my opinion the closer your cottage is to your primary home the better. Nothing kills the anticipation of vacationing at the cottage quite like a 4-5 hour drive getting there. One last piece of advice: it always helps to work with a mortgage broker who specializes in serving the area where you intend to purchase your cottage. Working with someone who knows the area can potentially help you save thousands of dollars in the buying process.
Feel free to contact us, for the best available rates and terms in Ontario or if you’d like to be set up on our VIP Priority Access System to receive all the new cottage listings as soon as they hit the market.