Thinking of Buying a Cottage? Here’s How to Leverage The Equity in Your Home to Make That Happen

Cottages have always been a hot commodity, but even more so this year as vacation destinations are limited and time away from the city can provide a much needed mental break and escape for many families.

 

But how do you get your hands on one of your own? Buying a cottage is probably much more realistic than you realized. Here’s how:

 

Leveraging Equity in an Existing Property

One of the most common ways that buyers are able to come up with a down-payment to buy their cottage is by using the equity that already exists in their home. This can fund the down payment, or you can finance the entire cottage this way.

 

For example, in Toronto, you can refinance your home up to a maximum of 80% market value.

• –  Your home is currently worth $1.2 million
• –  Remaining mortgage: $600,000
• –  You can refinance up to 80%, so up to a total of $960,000 mortgage
• –  $960,000 – 600,000 existing mortgage ≈ $360,000 cash

You can take that $360,000 in cash to buy a new property or as a secured line of credit.

 

 

What are the Down Payment Requirements for a Cottage?

Owner-occupied second homes/cottages:

• –  You can buy a cottage (second home) with as little as 5% down on the first $500,000 and then 10% thereafter to $999,999.
• –  If the property is > $1 million, you’ll need a 20% down-payment.
• –  The down-payment will depend on whether the property is 4 season cottage (Type A) or summer only (Type B) – see below for more detail about that:
  •   >  Type A cottages – minimum 5% down
  •   >  Type B cottages – minimum 10% down *some lenders may require more
    

 

 

Cottage Mortgage Qualifications change depending on the type of property.
What does this mean?

Type A Properties mean “All-Season Secondary Homes”:

• –  Owner-occupied or occupied by an immediate family member
• –  Single-family dwelling
• –  Property particulars:
  •   >  Must be a readily marketable residential dwelling
  •   >  Must be winterized with seasonal access
  •   >  Must have an estimated remaining life of > 25 years

 

Type B Properties mean “Seasonal Cottages”:

• –  Same property characteristics as Type A homes except:
  •   >  Seasonal access permitted (road not accessible in winter)
  •   >  The property does not need to be winterized
    

 

 

*Important Note: These are general guidelines only, for insured purchases less than $1 million. If the value of the property is over $ 1 million, lenders have their own separate requirements.

 

 

There are also some special financing considerations to keep in mind!

Most lenders will want to know upfront if there is safe drinking water or UV filters, to ensure that what comes out of your tap isn’t toxic. As a result, water potability tests may be required if the cottage is on the water. They may also do a risk assessment for flood in certain areas.

 

 

 

*Important Note: You should always have a financing condition in your offer on a cottage or second vacation home – usually for at least 10 business days. This allows for the appropriate water tests to be completed and for an appraisal to be scheduled (appraisals usually take longer to schedule in smaller communities).

 

 

 

The Biggest Takeaway?

Buying a cottage is probably more affordable than you think. Either way, the key to securing cottage living — and making that staycation a peaceful escape — is to speak to a mortgage broker first.

 

 

 

 

Few things have remained unchanged during the novel coronavirus pandemic.

Home appraisals are no exception.

They’re as routine as the sun rising every morning.

But even home appraisals have had to adjust to the COVID-19 pandemic that stresses physical distancing for the sake of public health.

Just a few short months ago, appraisers would walk through a home to assess its value when someone applied for a mortgage on a new property or hoped to refinance their existing home.

Now, with flattening the curve being top of mind, appraisers are relying more than ever on technology to do their job.

What to expect when getting an appraisal.

“There’s a lot that can be done on computers,” says Scott Nazareth, mortgage professional with Mortgages.ca.

Appraisers are turning to MLS in search of comparable sales to help determine a home’s worth. Then they’re making adjustments. Does your home have a marble floor? That will be considered in an assessment if an appraiser could only find similar homes with hardwood and carpet online.

The marketability of a home is also factored into appraisals. Is it next to a railroad or cemetery? What are the trends in the neighbourhood?

Appraisers did this kind of virtual legwork previously but more emphasis is put on it now.

Extraordinary assumptions in extraordinary times.

For as much as an appraiser can glean online, there’s nothing like seeing a home in person.

Appraisers typically go into a home to look at any renovations and upgrades. These days, they’re looking through windows, noting this in assessments as an extraordinary assumption. 

Extraordinary assumptions were frowned upon by lenders previously, but that’s changing, Nazareth says.

“Before, it would be considered a drive-by appraisal and not normally accepted,” he says. “Now lenders have accepted this new form of appraisal and it’s called a modified appraisal.”

Securing financing with a modified appraisal.

A-lenders quickly adjusted to accept extraordinary assumptions, Nazareth notes.

But private and B-lenders, which might be the only option for some borrowers, realize they’re taking on extra risk by granting financing based on these modified appraisals. B-lenders that may have offered up to 85 percent of a mortgage’s value before the pandemic has scaled back to 70 or 75 percent, Nazareth explains.

“They’ve really had to change their underwriting criteria and have had to change the amount they lend,” he says. “It’s definitely impacting the ability of clients to take money out in the alternative and private space.”