Looking to Buy a Cottage in Ontario? You're Not Alone!
(Five-minute read time)
Updated May 2024
As the spring season unfolds, there's a noticeable uptick in cottage inventory following a slowdown in sales at the end of 2023. Recent data from Chestnut Park Real Estate reveals a 59.8% increase in active listings of waterfront properties on the Muskoka lakes during the first quarter of 2024, compared to the same period last year.
Given the current market conditions, sellers are encouraged to adopt a competitive stance. For you, this means the dream of owning a cottage by the lake can become a reality this summer.
In this article, you will learn about the differences between Type A cottages and Type B cottages, mortgages for recreational properties, and the advantages and disadvantages of refinancing your home to fulfill your dream of owning a cottage in Ontario.
Are you currently or soon to be in the market for a home or recreational property?
There are still plenty of options available, and I'd be happy to review them with you.
Can You Get a Mortgage for a Cottage or Recreational Property?
Many lenders will offer a mortgage for your cottage purchase in Ontario. In some cases, you can purchase a cottage with as little as a 5% down payment.
However, make sure you work with a mortgage broker who can help you choose the right property because not every cottage will qualify for a mortgage. The guidelines for cottage purchases are often more complex than for most home purchases.
For Mortgages, There are Two Types of Cottage Properties:
Type A Cottages:
A cottage property can be classified as Type A if it meets some strict requirements. These kinds of properties will be similar to most family homes you would see in cities across Ontario.
Suppose you are purchasing a Type A property for your cottage. In that case, you will have more choice of lenders, and likely you will be able to secure a lower rate and more favourable terms. The lender will also be more willing to offer a larger mortgage.
Type A cottages typically need to feature:
Year-round access
Must be fully winterized
Must have a permanent heat source like baseboard heaters or forced air
Must have a potable water source
Must have a 3-piece bathroom and a kitchen
Must be zoned residential, rural, or seasonal (no rental pools or leased land).
Must have a permanent foundation installed below the frost line
Example of a Type A Cottage in Ontario
Type B Cottages:
Alternatively, many rural cottage properties will fit into the Type B category. Buying a cottage in Ontario that is Type B is an option, but with more restrictions on the amount of financing.
If you are looking to get a mortgage to purchase a cottage that doesn't fit the Type A requirements, you'll need to look at properties that feature:
Wood stove or fireplace heating
Floating foundation
Seasonal access
Running water (even if not potable)
Getting a mortgage on a Type B cottage could be more restricted. You will likely need a larger down payment (minimum of 10%). You'll also find that the lenders will only lend to a maximum of somewhere between $350k - $500k. Also, each lender may have its own specific restrictions.
Example of a Type B Cottage in Ontario
Buying a cottage in Ontario is a great way to promote family and recreational time. You might be working remotely and can spend more time at your cottage than you ever thought was possible.
Refinancing Your Home to Buy a Cottage
Many homeowners borrow funds from their primary residence to invest in a cottage. If the cottage you are looking at does not meet either Type A or Type B, or if you want to buy and renovate an existing cottage and you need access to more funds, you might consider refinancing your primary home to get the funds.
Refinancing Your Home to Buy a Cottage Has the Following Benefits:
No requirement for the cottage property to meet Type A or Type B standards
You can borrow more than the cottage costs, leaving extra cash for renovations or upgrades at the cottage
If your primary home is in a medium-sized city or bigger (50k people and more) then getting that property approved for a refinance will likely be easier than getting approved for the cottage
You can take advantage of rising property values in your primary home
You will probably have more choice of lenders and therefore more options for getting the best mortgage
Refinancing Your Home to Buy a Cottage Has the Following Downsides:
Your home might not have enough equity for you to purchase the cottage you want
Most lenders will only lend up to 80% of the value of your primary home including any existing mortgage. For example, say your home is worth $800k, so you can borrow up to $640k (80%). If you already have a mortgage for $300k, your balance available would be a max of $340k
You still need to income qualify for any amount you borrow
You could still incur legal costs, appraisal costs, and other closing costs when you refinance
You might need to break your existing mortgage and there could be a large prepayment penalty if you break your mortgage too early or if you have a fixed-rate mortgage
Conclusion
Feeling inspired by the possibility of owning your dream cottage? The team at WealthTrack is here to guide you through every step of the process, from exploring financing options to navigating the intricacies of cottage ownership. Book a call with us today and let's turn your dream into a reality.
FAQs on Buying and Financing Cottages in Ontario
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Yes, many lenders in Ontario offer mortgages for cottage purchases. You might even be able to buy a cottage with as little as a 5% down payment. However, the eligibility for a mortgage and the terms depend significantly on the type of cottage.
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Type A cottages must have year-round access, be fully winterized, have a permanent heat source, a potable water source, and a 3-piece bathroom and kitchen. They should be on a permanent foundation and zoned residential, rural, or seasonal.
Type B cottages might have seasonal access, use a wood stove for heating, and have a floating foundation, among other characteristics that generally result in stricter financing terms.
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Choose a mortgage broker who understands the complex guidelines for cottage purchases and can guide you in selecting a property that qualifies for a mortgage. A knowledgeable broker can help you secure more favorable terms.
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Refinancing your primary residence to buy a cottage allows you to bypass the standard property requirements of Type A or B cottages and potentially access more funds for purchasing and upgrading a cottage. However, you need to have sufficient equity in your primary residence, and you must still qualify for the borrowed amount. Additionally, refinancing might involve legal and appraisal costs, and potentially large prepayment penalties.
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Lenders typically allow you to borrow up to 80% of the value of your primary home, including any existing mortgage. For example, if your home is valued at $800k, you can borrow up to $640k. If you already have a $300k mortgage, the maximum additional amount you could potentially access is $340k.
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Financing for Type B cottages usually requires a larger down payment (minimum 10%) and is often capped at a lower total loan amount (between $350k - $500k). Lenders may also impose specific restrictions based on the cottage's features and location.
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