There are generally only a few ways a person in Ontario can own a cottage.
- They have $200,000+ stuffed under their mattress
- They inherited it through a family member
- They have a second mortgage
- They used the equity in their home
Now most people I know don’t have $200K sitting around and if you have inherited a cottage consider yourself very lucky. I am going to focus on the last two points and tell you about what I did to purchase our property.
Second Mortgages are not nearly as easy to obtain as a first mortgage mainly because the second mortgage is on a recreational property which is seen as a greater risk for default by the banks. Mortgages cannot be used to buy vacant land. The mortgage is against the building rather then the property so when applying for a second mortgage the vacation property must have a building on it.
At the time when I was looking for financing options these were the requirements for obtaining a second mortgage.
- Building must be 800sqft or bigger
- Must have all year access
- Must be winterized – meaning running water and heat in the winter
- Down payment of 35% of the purchase price of the property
A cottage with the above requirements on a swimmable waterfront lot would cost somewhere around $200,000 to $250,000. That would require you to make a down payment of $70,000 to $87,500! Again most people I know don’t have that kind of money for a down payment. On top of those requirements you still have to pass the normal credit checks and approvals for a mortgage.
This is assuming that there is just one person or one couple purchasing the property. If you were able to convince your friends or family to go in on the purchase with you then the financial burden would be much less and it is more likely you would be approved for the second mortgage. That being said there are pitfalls to sharing a cottage. (Look for a future article on this topic)
Refinancing with Home Equity
The route my wife and I chose was to use the equity in our home and refinance our existing mortgage.
This is how refinancing and equity can work:
- Market Value of your house is $500,000
- Your current mortgage balance is $300,000
- Banks will lend up to 90% of the value of your house for anything you want. Credit checks and approvals still apply.
- 90% of $500,000 = $450,000
- Subtracting your mortgage balance from $450,000 leaves you with $150,000.
- $150,000 is the maximum amount the banks will loan to you using the equity in your home.
As I mentioned this loan can be used for anything so the requirements listed in the second mortgage do not apply. This financing option let us buy a vacant lot and build whatever cottage size and type we want.
Additional Things to Consider
A mortgage at 90% of the value of your home means that, in Canada, you will have to pay CMHC insurance which is a penalty of 2% of the value of the loan.
You might find that with a standard mortgage your payments will be too high for you to pay. Canadian banks have introduced non-standard mortgages that have 30, 35 and 40 year amortizations compared to the standard 25 year amortization period. This means that you will be paying less per month, but also means that your payments will be more interest and less principal. There is a 0.20% CMHC fee for using the non-standard mortgages.
I hope this helps some of you out there wondering how you would ever be able to purchase a cottage.