Financing a Vacation Home or Cottage

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Cottages / Vacation Homes are Classified as Types A & B

Type A Cottages Requirements:

• Must be intended for occupancy as some point during the year by the borrower or relative on a rent-free basis (otherwise it is considered a rental).
• Winterized home with year-round (4-season) access.
• Potable running water, central heating, plumbing and electricity.
• Permanent foundation below frost line.
• Property needs to be readily marketable (easy to sell).
• Floating homes are possible.
• Rental pool / timeshare properties are NOT eligible.

Type B Cottages Requirements:

• Seasonal (summer road only) or boat access okay.
• Must have a kitchen, three-piece bathroom, bedroom and a common area
• Permanent heat source NOT required.
• Has running water, need not be potable.
• Toilet can be chemical, portable or holding tank
• Sits on a foundation (concrete blocks or pilings).
• Generally 850 sq ft or more
• Off-grid power likely OK if 50% down payment.
• Must be intended for occupancy as some point during the year by the borrower or relative on a rent-free basis (otherwise it is considered a rental).
• Cannot be used as your full-time home.

From a Mortgage Planning Point of View…

• In addition to the property requirements above, you must be able to personally qualify for mortgage financing.
• Interest rates might be 0.10-0.20% higher than a traditional mortgage mainly because property is not ‘owner occupied’ year round.
• Given the location of the property, many lenders will insist on CMHC/Genworth insured-lending regardless of the down payment provided, but conventional is possible for quality properties.
• Type A cottages can be mortgaged as a ‘second home’, similar to mortgaging a permanent residence, fixed and variable terms, minimum 5% down payment (if insured) not to exceed $1mil.
• Type-B require 10% down minimum down payment as a second home purchase with CMHC/Sagen loan insurance, not to exceed $350,000 (although some exceptions available on case-by-case basis).
• Type-A can be refinanced provided 20% equity remains in property and a quality property.
• Type-B generally have limited to no refinance options.
• The minimum down payment for a non-insured property purchase varies by lender from 20-40%.
• Insured mortgages may have further restrictions on the maximum loan amount depending on location and access.
• Many borrowers prefer to refinance their existing primary residence and pay cash for the second home, as it is often easier.
• Draw/construction (progress-advance) mortgages are available.
• Financing on raw (un-serviced) land usually requires 50% down payment, though ~25% is possible for prime locations (for example, an un-serviced lake lot).
• It is important to note that cottages and 2nd homes can not be used for investment purposes or as a rental; lenders do not accept rental pools or timeshare properties under this program.
• Finally, it is implied that the property is located in Canada.

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