Purchasing a cottage is a dream for many Canadians. There are several ways you can obtain financing for a cottage and make your dreams a reality!
When searching for your perfect cottage it’s important to note the two types of cottages that have their own set of mortgage financing rules. While the basic process of applying for and qualifying for a mortgage on a cottage is the same, lenders will look at many more variables when assessing a property before lending money to buy a cottage.
Type A Cottages
- Set on a permanent foundation below frost line
- Fully winterized/4 season dwelling with year-round access
- Permanent heat source, potable running water, plumbing and electricity
- Located in an area with demonstrated, reasonable resale demand
- Property is in good condition
Type A cottages are mortgaged similar to a permanent residence. Obtaining financing for a Type A cottage requires minimum 5% down payment and you maintain eligibility to refinance the property down the road once there is enough equity built up.
Type B Cottages:
- Needs full foundation
- No permanent heating source
- Property does not have to be winterized
- Property does not need year round access
Type B cottages require a minimum of 10% for down payment and could be up to as much as 35% depending on the property. Unlike Type A cottages, Type B are not eligible to be refinanced at any time and the value of the cottage must not exceed $350,000.
For both types of cottages, if the down payment is less than 20%, an insurer’s premium will be added. To come up with funds for downpayment or to buy the cottage outright you can refinance your current mortgage up to 80% of the value of the home and use it towards the cottage downpayment. Other sources of down payment could include, RRSP's, personal savings, gifted money, or a combination of several options.
The cottage must be intended for occupancy by the borrower or a relative of the borrower rent-free at some point during the year, otherwise the property will be considered a rental property by the lender. Rates for cottages may be higher than a traditional mortgage because the property is not owner occupied all year-round.
When investing in a cottage, it’s important that you research your options and remember to consider your full financial picture and budget when looking to buy a cottage. At Mortgage Teacher, we shop all the major banks and lending institutions and can help you strategize to see if buying a cottage will suit your lifestyle and financial goals.