Dreaming of ducks and docs at a vacation home as a retreat from concrete and congestion? You are not alone. Many people dream to own their own private little getaway whether on a lake or in the mountains. Financing these property types is very different than financing a home in the suburbs.
Unless you have the cash in hand you need to understand how financing vacation homes work so you’re well prepared.
Lenders classify vacation homes into either a type A or type B property, depending on what the property has to offer.
Type A Requirements:
Must be intended for occupancy at some point during the year by the borrower or relative on a rent-free basis.
It must be winterized with year-round access. It must have potable running water, central heating, and not just a wood-burning stove and have electricity.
The property needs to be on a permanent foundation and readily marketable (easy to sell)
Rental pools or timeshares are NOT eligible.
Financing this type of property is similar to financing a permanent residence and requires a minimum of 5% down payment. You can choose either a fixed rate or variable rate mortgage. If putting less than 20% down payment, there will be an insurance premium added to the mortgage.
Cottage hunters who want a more wilderness experience will likely find it harder to finance.
Type B Requirements:
Seasonal access is ok
A permanent heat source is not required however it must have running water.
It can sit on a foundation of either concrete blocks or running water.
It must be intended for occupancy at some point during the year by the borrower and cannot be your fulltime residence.
Genworth Canada will provide financing insurance on these types of homes with a 10% down payment while Canada Guaranty does not nor CMHC. If trying to avoid an insurance premium most banks require 35% down payment over the 20% required for a type A property.
Many lenders will often still look at having the property insured even if you have put 20% or more down payment.
A type-A property can be refinanced later in time however a type B property cannot. If you’re looking for something more rustic, something un-serviced expects to have at least 50% down payment.
It is important to note that cottages and second homes cannot be used for investment purposes or as a rental. They cannot be in a rental pool nor can timeshare properties be financed.
Sometimes when your primary owner-occupied home may be free and clear, meaning no mortgage is owed, we can look at refinancing that property with a Home Equity Line of Credit (HELOC). This gives you the ability to purchase any type of property you wish. A HELOC can be at 65% of your home’s appraised value. Here is an example:
Appraised value: $600,000.00 X .65% = $390,000.00
This 390k line of credit secured against your home allows you to use the money as you wish. Lines of credit are usually at prime + .5%. Anytime there is a change in prime rate, this follows as well.
So before you head out driving country roads or searching for a lake property, please let our trusted Edmonton mortgage broker give you an idea of what your financing will look like and what to expect. Owning a lake home is a great place to spend quality time with family and friends, sitting by the fire, fishing off your dock, and watching the sunsets.
Typically, when you purchase one of these properties you need the toys to go with it. If buying a lakefront home, it’s always nice to have a boat whether it be a fishing boat, canoe, paddleboat, kayak, ski boat, or the newest craze a stand-up paddle surfboard.
Your local Edmonton Mortgage broker Eva Neufeld has had the pleasure for over 25 years owning a cottage and enjoyed many amazing family get-togethers. Let me help open the door to a cottage property for you.