For many, a cottage is more than just a vacation destination; it’s a second home to escape the hectic city, create lasting memories from one generation to another, enjoy a peaceful retirement or all the above.
The lifestyle changes and travel restrictions brought on by the COVID-19 pandemic have accelerated the plans of many and purchasing a cottage is now on many people’s radar. This surge in interest and demand has led to a dramatic rise in cottage prices. If you’re considering purchasing a cottage, it’s worth exploring your financing options before you start making purchase offers.
Here are some options to consider:
1) Obtain a conventional mortgage
Similar to your primary residence, you may be able to obtain a mortgage designed specifically for a cottage. The amount you can borrow will depend on the type of cottage you purchase and whether it’s classified as a “Type A” or “Type B” property.
“Type A” cottages are categorized as secondary homes that can be used as primary residences. This type of cottage is suitable for year-round access, with a permanent heat source and running water. Type A cottages require a minimum 5% down payment, fixed and variable terms with eligibility to refinance once equity has built up.
A “Type B” cottage is treated as a vacation home and is built for seasonal access, with no permanent heat source. Mortgages for Type B cottages require a minimum 10% down payment, also with fixed and variable terms, and generally has no refinance option.
2) Use equity from your home
A common technique to finance a cottage is to access the built-up equity of your primary home. By using this equity, you can fund the down payment or the entire purchase of the cottage. Depending on how things are currently structured with your existing home and your available equity, you may not need to go through the refinancing process.
Instead, you may have the option of setting up the newly borrowed funds as a Home Equity Line of Credit (HELOC) or mortgage. This can also result in a lower interest rate as secondary property financing often has a higher interest since the property is not “owner-occupied” year-round.
3) Liquidate investments/savings
If you have adequate funds in an investment account or savings account, you can choose to liquidate those investments and ask your financial institution to issue a bank draft/certified cheque for the required amount. While this option may appear to be the simplest, you should carefully consider any potential tax consequences.
If the available funds are held in an investment account, there is the potential that liquidating the investments will trigger a deemed disposition. That means you will need to report the transaction on your tax return and pay any applicable taxes.
If you are looking to finance your cottage purchase (Option 1 or 2), consider the impact of liquidating the investment, purchasing the cottage, and then borrowing funds to reinvest back in your portfolio. If structured properly, the interest paid on the borrowed funds can potentially be tax deductible.
To learn more about the different options available for financing a cottage, call our office today.
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source https://richarddri.ca/financing-your-cottage-or-vacation-home/
Dri Financial Group 