The pink-hued sunsets. The shimmering lake. And, of course, the quality family time. After years of renting a cabin or cottage, you’re ready to own a recreational property. But are you prepared for the financial commitment involved with the purchase? Consider these five questions.
How much time will you spend there?
Face it: Owning a recreational property is primarily an emotional decision. Just don’t forget to run the numbers, too. “It doesn’t really make financial sense to own one unless you plan to be there two to three months a year,” says Jason Nicola, a financial adviser at Nicola Wealth Manage- ment in Vancouver. If you plan to rent out your cottage for a portion of the year, look for a property that’s already set up as a rental and has established bookings, suggests Rob Serediuk, an agent with Chestnut Park Real Estate serving Ontario’s Kawartha Lakes and Haliburton region.
Has your mortgage been preapproved?
Know ahead of time what an accredited mortgage professional is prepared to lend you and under what circumstances. Many lenders won’t approve loans to buy nonwinterized cottages, for instance. If they do, the lender may demand up to 50 percent equity up front and charge a higher interest rate on the mortgage, says Angela Calla, a mortgage broker at Dominion Lending Centres in Vancouver.
Most people fund a cottage by refinancing their principal residence and using the equity built up in that home, plus whatever their financial institution or accredited mortgage professional is willing to lend them. As of May 30, the Canada Mortgage and Housing Corp. (CMHC) stopped offering mortgage insurance on secondary properties, meaning those already holding a CMHC-insured mortgage are no longer able to act as co-borrower on another insured mortgage. A minimum 20 percent down payment is now required for any purchase, Calla says. She notes that private insurers continue to offer these programs to qualified applicants.
Is the property insurable?
Before committing to the purchase, make sure you won’t have difficulty getting the place insured. Serediuk likes to have a condition-on-satisfactory-insurance clause written into the purchase offer. “You don’t want to buy a cottage and then try to get insurance, only to find out that it will cost you big money to get those two fireplaces you love up to code,” he says.
Some insurance companies may increase rates depending on the type of cottage. A seasonal or water access–only property, for instance, is harder to insure. And you may need additional coverage for detached buildings like a boathouse or shed. In any case, Serediuk suggests getting a quote from local insurance brokers who understand cottage intricacies. “They are used to dealing with recreational properties and can drop your rates considerably,” he says.
Can you cover the extra costs?
Like primary residences, you’ll need to factor in property taxes and land transfer fees, as well as maintenance costs. Vacation homes are often located on private-access roads, which means you and other owners will need to fork over funds for snowplowing and other road maintenance. But some owners may not use their cottages year-round and opt out of plowing service. That means big money for the families who do hang in. Serediuk cites an example of a street with nine cottages. Just three families had to split the plowing costs to the tune of $1,500 each. And don’t forget other incidentals such as “toys” you might want to buy, from canoes to personal watercraft.
Are you planning to share ownership?
Can’t afford a cottage on your own? Splitting costs with family or friends sounds great in theory, but what happens if the roof caves in and the other party doesn’t have the money to pay for repairs? “It has to be treated like a business relationship,” says Serediuk, who recommends using the services of a real estate lawyer versus a simple written agreement between buyers. “Make sure all expectations are set and you have a binding legal agreement.”