Skip the house, buy the cottage
By Kim Pittaway
Photography Derek Shapton
Trend alert: millennials are becoming cottage owners. But, surprise, they’re not doing it the way their parents did
The text arrived as they were on the way to a family wedding, only a few months after Shantel and Ian’s own wedding. The couple had been thinking about starting to hunt for a house in Toronto, but weren’t very excited about the task. “I knew that whatever we could afford in the city would be something we’d be settling for” is how Shantel puts it. She and Ian figured the best they would do in Toronto would be to get a small starter home or condo, which they would then aim to buy up from before eventually—at some distant date in the future—ending up with a house that would be their “forever home.” And that made anticipating that first property purchase seem more like a grind than a joy. Still, they weren’t thinking of other options until Ian’s father got the email that flipped their property priorities. “Ian’s dad was joking,” she says, “but we were like, maybe yes.”
Even with a recent market softening, the average price of a detached house in Toronto is still more than $1 million, and in Vancouver, at almost $3 million, owning a house is beyond the reach of many millennials. “Home ownership has become unattainable in the Lower Mainland of B.C. for a number of years, even for people with very good incomes,” says Al Dubé, a financial advisor with Dubé Insurance and Wealth Advisory Services in Victoria. “But vacation properties can be much more affordable.” When you consider that the average price of recreational properties in Southern Ontario is $413,000, with waterfront properties on Saltspring and Vancouver Islands clocking in at around half a million dollars, the logic of entering the real estate market via the cottage market becomes clear. >>
While more millennials might be opting for a cottage-first property strategy, they aren’t the first to have done so. The sign on Izumi Miki McGruer’s dock says, Where Dreams Really Do Come True. McGruer and her husband bought the periwinkle ski chalet–style house at Indian Arm on B.C.’s Pacific coast for $380,000 16 years ago, while still renting in Vancouver. Indian Arm is a steep-sided fjord adjacent to Vancouver, the territory so rugged that it’s virtually inaccessible by road—but it’s just a 30-minute journey by boat from the city’s downtown. “We’d been boaters for a while, but hadn’t thought that buying a boat-accessible property might be an option,” says McGruer. “We were out on the water one day and came around the corner into this place that just took our breath away.” McGruer, the managing director of Freedom 55 Financial in B.C., sees more and more of her clients opting to use the “ocean road” as a quicker commute out of Vancouver (with some even opting for float planes). While she and her husband eventually did buy a city property, she considers their weekend place their real home, with their city property a place they stay at while working. “Indian Arm is our slice of paradise.” >>
The couple had been saving for a house, but diverted the funds to the cottage down payment instead. Still, the financing didn’t go smoothly. As they made their offer, they thought they had a pre-approved mortgage sorted out, but when the bank realized that the purchase was a seasonal island property, the terms shifted dramatically: “They asked us for a 50 per cent down payment.” Their realtor quickly connected them to a mortgage broker in cottage country, and they ended up getting a mortgage with 15 per cent down.
That kind of last-minute scramble isn’t uncommon, especially if communication between the lender and borrower hasn’t been crystal clear, says Michelle Drover, the vice-president for Atlantic Canada of Verico Premiere Mortgage Centre in Halifax, N.S. “Mortgage rules have changed a lot in the last couple of years, and there are more factors than ever that can affect what you can get, and what interest rate you’ll pay,” says Drover. There are essentially two levels of mortgage classification: Type A properties, which could be cottage or residential properties, and which have central heating and year-round road access; and Type B properties, which may or may not have central heating and may only have seasonal road access. With a Type A property, you can get a 95 per cent mortgage with a five per cent down payment; Type B properties may be financed up to 90 per cent with as little as 10 per cent down payment. But other factors can come into play in determining the required down payment and your interest rate: a prime location and good future marketability could net you a better interest rate, while needing cottage rental income to help make ends meet could boost your rate. “The lender needs to truly understand what the client is looking to do to give them the best mortgage product,” says Drover. “You want to do it in advance and be absolutely clear.” >>
While traditional financing and insurance came together for the Clarks, things didn’t fall as neatly into place for Keith Shiner, whose hunt for his dream cottage didn’t go quite as he’d hoped. “I knew from the time I was 14 or 15 that I would own a cottage before I owned a house,” he says. “I grew up going to my grandparents’ cottage at Lake of Bays, and I just knew that’s what I wanted.”
In his late 20s, Shiner started looking for a fixer-upper on good lakefront within three hours of Toronto, aiming to qualify for a mortgage of around $110,000. “I quickly found out that my budget didn’t align with my desires,” he says. Then he noticed lots being sold around Miskwabi Lake in Haliburton. It was 1999, and the initial development opened up 50 lots, with municipally maintained roads. “The first time I drove in, the roads were still being built. I hiked across the lots, and as I looked at the orange stakes, through the trees to the water, I could envision the cottage. It was just beautiful: a quiet, clean lake surrounded by forest.” >>
The first 10 years, to be precise, during which he paid off the line of credit, diverting his RSP contribution to pay it down. “I was confident the land would increase in value as much or more than my RSp would,” he says. “I was lucky that that turned out to be true.” (He adds: “You can’t swim in a mutual fund.”) By then Shiner had met his future wife, now Meaghan Phillips-Shiner. They camped on the land, and when they decided to get married, Shiner made what he thought was an audacious suggestion: “ ‘We should build a cottage before we buy a house,’ I said. And to my surprise, she said that was a great idea.” The couple knew it would mean compromising on what they could expect to buy in the city, “but my wife was all in—she said, we’ll be raising our family up there, and that’s where she’d rather put the money.” >>
Plan for the worst, says Stephenson, or for the not-quite-best. That means making sure you could still carry the property even with a one or two per cent interest rate hike. If you lost your job or had a health crisis, could you move to the cottage full-time to cut costs? How fast could you sell if you had to get out? “Buy less than what you can afford, so that if your circumstances change for the worse, you don’t have to sell at a fire-sale price,” she says. And don’t believe anyone who says your cottage property is guaranteed to go up in value. “I had a client whose agent told her she was guaranteed a 15 per cent annual return based on past price increases—but no one can guarantee that,” she says.
If it’s your only property and you commute there regularly, you could claim your cabin as your principal residence (to avoid capital gains taxes when you do decide to sell)—but consult an accountant to be sure you don’t run afoul of Canada Revenue Agency rules.
Ann Chiasson, of Re/Max Sea to Sky Real Estate in Whistler, B.C., sees this trend in her area as well. “They’re taking their city equity and buying grandkid catchers,” she says, especially in nearby Squamish, with its hospital and ample recreational facilities.
While they didn’t use equity from the cottage to help finance the house, the cottage was an asset on their balance sheet, which Shiner says helped in landing their city mortgage. “If you have enough equity—more than 20 per cent—in a cottage,” says Dover, “you can use that to help finance the down payment on a new primary residence in the city.” But while the financial equation worked out well for Shiner and his family, not every buyer can count on that. A vacation property isn’t necessarily going to increase in value at the same rate that a city home might, for instance, says Tom Davidoff, an economist at UBC’s Sauder School of Business. “In places like Toronto and Vancouver, if you’re locked out of buying in the city, it could look like it makes sense to buy a vacation property so that you have some real estate in your portfolio. But a home in Kelowna isn’t the same kind of investment as a home in Vancouver, so it’s not a terribly effective way to hedge the market,” says Davidoff. Still, the decision to buy a property, whether in the city or not—like many decisions that have economic impact on our lives—isn’t always a strictly rational one, Davidoff acknowledges. >>
The fact that the couple are still renting in the city also makes the financial burden of the cottage easier to carry. “We know what the fixed cost of renting is, and there are no surprises, so anything extra we have can go into the cottage,” she says. “We’ve shifted our mindset on buying in the city. We don’t feel pressure to buy anymore. We’ve got roots, something that’s ours: the cottage.”
Kim Pittaway teaches creative non-fiction at University of King’s College in Halifax.