Add a cottage to your real estate repertoire
Consider the options and beware of the risks when seeking a mortgage on a recreational property
When Mike Bayer purchased Seabreeze, his twobedroom cottage on Lake Ontario in 2010, he was well aware he might have to do some dancing to get financing.
Bayer was in his 20s at the time, but as a rental agent and through his blog (cottageblogger.com), he’d been in the vacation rental business for several years.
Bayer, now 34, knew from experience that lenders often view recreational homes as inherently more risky, which is why the down payment and interest rate for a vacation property can be higher than for a permanent residence.
As Janine Weis, a mortgage agent with Mortgage Intelligence in London, Ont., explains it: “The feeling is, if borrowers get into some financial difficulties, they will place more importance on paying the mortgage on their primary residence.”
In addition, Weis says, under slow market conditions, cottages can take longer to sell, so lenders may fear that their interests aren’t protected.
If you’re considering buying a cottage, says Maureen Reid, a branch manager with Meridian Credit Union in Penetanguishene, Ont., you should probably visit your financial institution first to find out how much you can afford and get some pointers on what to look for.
“There are different types of financing based on the type of cottage you’re going to purchase,” says Reid.
As do most lenders, for instance, Meridian differentiates between cottages that have plenty of amenities and are easily accessible, usable year-round and more centrally located, often with other cottages around (Type A) and cottages that are more remote and rustic, perhaps only accessible by boat and usable only in the summer (Type B).
Since Type A properties have features similar to a residential home, “folks might get the same rate they would on their home mortgage,” says Reid.
Type B properties would require a whole different kind of financing.
“Then you need to get a personal loan with open terms and loan rates,” Reid says. “So the interest rates are higher — at 5 per cent and above.”
What’s more, she says, while as a rule of thumb you’d require 20-percent down to buy a Type A property, the guidelines on a remote property would require you to put down more like 35 per cent.
“But if we have a strong applicant there may be exceptions,” Reid explains.
“We look at the big picture, and what it really comes down to is the applicant’s net-worth statement. What can they afford?”
Reid suggests seeking financing in the area you intend to buy a cottage, noting local lenders are more likely to understand the market and may be more amenable to offering the cash you need.
Bayer’s solution was to call a mortgage broker because they have access to a wide range of lenders.
“She worked wonders to get us a really great rate,” he says, “as well as a relatively low down payment.”
Bayer always saw the cottage as a way to generate rental income. But, in the five years since he and his wife bought, they’ve become victims of their own success.
“It’s so totally booked now that every time we use it, it costs us $1,700 for the week, even in September,” says Bayer. The consequence: With two toddlers underfoot, the Bayers almost never take a week at their own cottage.