summer-cottage-mortgage

Financing a Vacation Home or Cottage

In this article, we provide an overview of mortgage requirements for purchasing or refinancing a second home, such as a summer home, cottage, or other recreational property, including foreign property.

The General Thought on Purchasing a Summer Cottage or Vacation Home

  • Changing lifestyles affect the decisions Canadians make on how and where they choose to live.
  • Second homes are very popular for weekend and vacation getaways.
  • Conversely, second homes are a popular way to decrease the weekly work-day commute.
  • Second homes are popular for housing your university-bound child.
  • It is possible to finance a second property with owner-occupied (best) interest rates and rules.

Cottages / Vacation Homes are Classified as Types A & B

Type A Cottages Requirements:

  • Must be intended for occupancy as some point during the year by the borrower or relative on a rent-free basis (otherwise it is considered a rental).
  • Winterized home with year-round (4-season) access.
  • Potable running water, central heating, plumbing and electricity.
  • Permanent foundation below frost line.
  • Property needs to be readily marketable (easy to sell).
  • Floating homes are possible!
  • Rental pool / timeshare properties are NOT eligible.

Type B Cottages Requirements:

  • Seasonal access is okay.
  • Permanent heat source NOT required.
  • Has running water.
  • Sits on a foundation (concrete blocks or pilings).
  • Must be intended for occupancy as some point during the year by the borrower or relative on a rent-free basis (otherwise it is considered a rental).

From a Mortgage Planning Point of View...

  • Interest rates might be 0.10-0.20% higher than a traditional mortgage mainly because property is not ‘owner occupied’ year round.
  • Given the location of the property, many lenders will insist on CMHC/Genworth insured-lending regardless of the down payment provided.
  • Type A cottages can be mortgaged as a 'second home', similar to mortgaging a permanent residence, fixed and variable terms, minimum 5% down payment (if insured) not to exceed $1mil.
  • Type-B require 10% down minimum down payment as a second home purchase with CMHC/Genworth loan insurance, not to exceed $350,000.
  • Type-A can be refinanced provided 20% equity remains in property.
  • Type-B generally have no refinance option.
  • The minimum down payment for a non-insured property purchase varies by lender from 20-40%.
  • Insured mortgages may have further restrictions on the maximum loan amount depending on location and access.
  • Many borrowers prefer to refinance their existing primary residence (mortgage or home equity line of credit) and pay cash for the second home, as it is often easier.
  • Draw/construction (progress-advance) mortgages are available.
  • Financing on raw (un-serviced) land usually requires 50% down payment, though ~25% is possible for prime locations (for example, an un-serviced lake lot).
  • It is important to note that cottages and 2nd homes can not be used for investment purposes or as a rental; lenders do not accept rental pools or timeshare properties under this program.
  • Finally, it is implied that the property is located in Canada.

If you have any questions, please contact us.  If you are interested in financing a foreign property, please continue reading below.

    

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Mortgage for a Second Home in USA, Costa Rica, Panama, or Mexico

Mortgage for a Second Home in USA, Costa Rica, Panama, or Somewhere Else Warm

  • Understand that Canadian lenders will only provide you a mortgage if they can register their mortgage against a Canadian land title or deed in a Canadian (not foreign) land title system, using Canadian lawyers in order to enforce the contract in a Canadian court, if ever required.
  • This rule holds true for lenders in other countries as well - they will only lend on properties within their legal jurisdiction.
  • Option 1 - there are a number of Canadian banks operating in foreign countries, and a borrower typically must deal directly with the foreign bank office, not a Canadian branch.
    • For the USA, where language and rules are quite similar to Canada, this can be fairly straightforward.
    • In other countries, getting a mortgage locally can be time consuming, exhausting, and expensive
    • Ask us for a referral if you would like to try this option.
  • Option 2 - for many, refinancing your principle Canadian residence and using the equity to purchase your foreign home is by far the simplest finance solution.
    • Up to 80% of the value of your home can be refinanced, for example: if you have a home worth $500,000 and only hold a mortgage of $250,000 you can refinance to $400,000, payoff the $250,000 mortgage and use the other $150,000 to buy a vacation home.
    • The interest rate will be lower because you remortgaged your permanent residence and have no mortgage owing on the vacation home.
    • Makes it simpler and faster to buy in the foreign location.
    • There are no restrictions on the use of the vacation home, such as if used for a rental

If you or your client, friends or associates have any questions on this or any mortgage situation or need, please feel free to contact us.

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