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.

Important - In addition to the considerations on this page, please make sure you can mortgage-qualify under the new rules!

"To mortgage qualify, you need sufficient Income, Credit, and Equity (I.C.E.)"

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.

   

As licensed professional mortgage brokers, we know exactly what it takes to qualify you for a mortgage and we do more than just get you a great mortgage at a great rate, we will show you the way, too.

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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
    • We have noticed that HSBC and Scotiabank are often active in these warmer places, but you have to visit a local branch on your next visit.
  • 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
  • Option 3 - buy a Canadian rental property with 20% down, use the rental income to pay down the mortgage and use the surplus to finance your annual trip to some place warm. Much easier to manage when the property is close-at-hand, no rogue property managers renting out your foreign place under the table, no foreign tax rules or compliance issues, Canadian laws if something comes off the rails, and likely a much better return on investment.

Important - In addition to the considerations on this page, please make sure you can mortgage-qualify under the new rules!

"To mortgage qualify, you need sufficient Income, Credit, and Equity (I.C.E.)"

Refinance/Renewal Pre-Assessment

Borrowing On Home Equity

 

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