Owning a cottage in Canada sounds like the perfect dream, doesn’t it? A cozy place to escape, surrounded by nature, where you can unwind and make memories with family and friends. But before you can relax by the lake, there’s the matter of financing. Getting a mortgage on a cottage in Canada isn’t exactly like getting one for your primary home. Cottages are unique, and so are the rules and processes when it comes to buying one.
In this guide, we’ll cover everything you need to know about financing a cottage. From understanding the different types of cottages to down payment requirements, stress tests, and potential capital gains, we’ll break it all down in a way that’s easy to follow. Ready? Let’s dive in!
What Makes A Cottage Different?
First things first – cottages aren’t like your regular homes. They’re often tucked away in rural or remote locations and can come with some quirks that you won’t typically find in suburban houses. Understanding these differences is key when you’re looking at getting a mortgage for one.
In Canada, cottages generally fall into two categories:
Type A Cottages (Four-Season Cottages)
A Type A cottage is basically a house, just not in the city. These cottages are built for year-round use. They have all the essential features that make them livable during any season – like proper insulation, heating, a solid foundation, and dependable plumbing and electrical systems. You can get to them in the winter, and most importantly, they meet the standards most lenders require for financing. This makes them much easier to mortgage because banks see them as lower risk.
Type B Cottages (Three-Season Cottages)
On the flip side, a Type B cottage is a bit more rustic. These cottages are typically for summer use, meaning they might not have proper insulation, reliable heating, or even consistent running water. They could be harder to reach during winter, making them less accessible and less appealing to traditional lenders. Since they don’t meet all the criteria for a year-round home, banks might view them as a riskier investment.
Down Payment Options For Cottage Mortgages
Now that you know the types of cottages, let’s talk about down payments. The type of cottage you want can affect how much you’ll need to put down.
Down Payment For Type A Cottages
For Type A cottages, most lenders will treat them like a regular home, so you can expect down payments starting at around 5%, depending on the purchase price and your financial situation. This makes financing a four-season cottage more accessible for many buyers.
Down Payment For Type B Cottages
However, Type B cottages usually require a larger down payment, sometimes as high as 20% or more. The reason? Lenders consider these properties riskier since they aren’t suitable for year-round living, which could make them harder to sell if you default on your mortgage.
| Pro Tip: If your heart is set on a three-season cottage, having a larger down payment can increase your chances of approval and possibly even get you a better interest rate. |
What About The Mortgage Stress Test?
Ah, the stress test – it’s a key part of the Canadian mortgage landscape. No matter if you’re buying a primary home or a vacation property like a cottage, you’ll need to pass this test. It ensures that buyers can still afford their mortgage payments if interest rates go up.
When you’re applying for a cottage mortgage, lenders will use the higher of either the Bank of Canada’s benchmark rate or your contract rate plus 2%. This way, they can make sure you’ll still be able to make payments even if the rates increase.
Since cottages can come with higher interest rates (especially if they’re more rural or less accessible), passing the stress test might be a little trickier. It’s smart to do some calculations beforehand to see how different rates could affect your monthly payments.
Financing Challenges For Cottages
Cottages come with their own set of hurdles when it comes to financing. The biggest challenges are often tied to:
- Location: The more remote the property, the fewer the lenders who might be willing to finance it. A cottage that’s hard to access in the winter can make it hard for a lender to sell if you default, making it a higher risk.
- Condition: Lenders are more likely to finance a well-maintained cottage that meets basic standards for living. A run-down cabin with no running water or insulation? That’s going to be a harder sell.
- Rental Potential: If you plan on renting out your cottage when you’re not using it, some lenders might be more open to financing because of the potential for rental income. However, be sure to check local bylaws, as not all areas allow short-term rentals.
Taxes And Cottages: What You Need To Know
One of the less fun parts of owning a cottage is dealing with taxes. Here are two key taxes you need to be aware of:
Capital Gains Tax
If you sell your cottage in the future and its value has increased, you might owe capital gains tax. Unlike your primary residence, which is exempt from capital gains tax, cottages are considered secondary properties. That means any profit you make from selling could be taxed.
Let’s say you bought a cottage for $200,000 and sell it a few years later for $300,000. That $100,000 increase is your capital gain, and you could be taxed on 50% of that gain, depending on your income and tax bracket.
However, if you use your cottage as your primary residence for a period of time, you may be able to reduce or even eliminate the capital gains tax using the principal residence exemption. Speak with a tax professional to get the best advice for your situation.
Property Taxes
Just like any other property, cottages are subject to property taxes. The amount you’ll pay varies depending on the location of your cottage. Some municipalities charge lower rates, especially in rural areas, while others could have higher taxes if the property is in a popular vacation spot.
It’s a good idea to factor property taxes into your overall budget when considering cottage ownership. Even if you’re not living there full-time, the taxman still wants his share.
Cottage Insurance
Another thing you’ll need to budget for is insurance. Insuring a cottage is a bit different from insuring your primary home, especially if it’s a seasonal property.
What Does Cottage Insurance Cover?
Cottage insurance typically covers the structure itself, along with contents and personal liability. However, if your cottage is a three-season property, certain risks might not be covered. For instance, damage from frozen pipes in the winter may not be included if the cottage isn’t winterized.
If you’re planning on renting out your cottage, you’ll also want to add rental coverage to your policy. This protects you in case renters damage the property or if someone gets injured while staying there.
How Much Does Cottage Insurance Cost?
Insurance costs depend on factors like the size of the cottage, how often it’s occupied, and where it’s located. Remote cottages tend to cost more to insure since they’re harder to access in an emergency. A four-season cottage in a well-populated area will typically have lower premiums than a rustic cabin in the middle of nowhere.
Preparing For Unexpected Costs Of Owning A Cottage
While owning a cottage may seem like a dream come true, it’s important to be prepared for the hidden costs that can sneak up on you. Beyond the mortgage, taxes, and insurance, there are maintenance expenses, utility costs, and potential surprises like repairs.
Cottages, especially older or seasonal ones, often require more upkeep than a standard home. You might need to budget for regular maintenance, such as roof repairs, replacing windows, or servicing your septic system.
Utility costs can also be unpredictable. Heating costs in the winter for a four-season cottage or extra electricity for summer air conditioning can add up. If your cottage is located in a more remote area, you might also face higher delivery fees for things like propane or repairs due to limited service availability.
Additionally, depending on where your cottage is, you may need to invest in things like pest control or flood protection. Be sure to budget a bit extra for these potential costs so you’re not caught off guard down the road. With careful planning and budgeting, you’ll be better equipped to handle any surprises, letting you enjoy your cottage without the stress of unexpected financial burdens.
Should You Consider A HELOC For A Cottage?
If you already own a home and have built up some equity, a home equity line of credit (HELOC) could be a great option to help finance your cottage. A HELOC allows you to borrow against the equity in your current home.
The downside? You’re using your primary residence as collateral, so if you fall behind on payments, your home could be at risk.
Final Thoughts: Is A Cottage Right For You?
Owning a cottage in Canada can be an incredible experience – from quiet weekends by the lake to creating lasting memories with family. But it’s important to understand that buying a cottage isn’t as straightforward as buying a home in the city.
From larger down payments to passing the stress test and understanding the tax implications, there’s a lot to consider. Take the time to research your options, speak to lenders, and even consult with a financial advisor to make sure you’re ready for the responsibility of cottage ownership.
By getting informed and planning ahead, you’ll be much closer to turning that cottage dream into a reality!
