Real Estate

Everything you need to know to apply for a cottage mortgage

Mortgage Broker Photo by Shutterstock/G-Stock Studio

So you’re planning to buy a cottage. You’ve probably spent months perusing listings, figuring out what type of property you want, and meeting with realtors. The next step in purchasing your dream cottage is getting pre-approved for a mortgage. This can feel like a daunting process, especially if you’re already paying off a mortgage on your house. To help smooth the way, we’ve assembled all the tips you need to secure a cottage mortgage.

What does a broker look for in a cottage mortgage application?

It’s all about the debt-to-income ratio, says Andrew Thake, a mortgage broker based out of Ottawa. To gain a broker’s confidence, you want to show them that you have a good credit score—typically 680 or higher. To get a good credit score, you need to be paying off your debts on time, including credit cards and other mortgages.

“Even if they had $100,000 on credit cards, that’s fine, as long as they’re paying them on time,” Thake says. “As long as there’s enough income to cover the debt, someone could really have as many debts as they want.”

Savings are a great cushion when taking out a second mortgage, but it won’t do much to sway a broker into approving your application. “Whether you have $10,000 in the bank or $10 million in the bank, that’s nice, but it’s not a heavy application decision-making factor,” Thake says. A broker wants to see that you have the income necessary to cover the mortgage payments and any other outstanding debts.

What type of cottage is it?

Once a broker has pre-approved your mortgage application, they’re going to want to talk about the type of cottage you’re looking for and which lenders would work best for your situation. Traditional lenders, such as banks, like a multi-season place, Thake says. “A three-season or four-season cottage, it’s no different than if someone came and said, ‘I want to buy a condo downtown.’”

These are cottages that could be used as a primary residence with a secure foundation; access from a municipally-maintained road; a permanent heat source, such as a furnace or boiler; and potable running water—this includes a well or water from the lake run through a filtration system. These types of properties typically only require a five to 10 per cent down payment.

On the other hand, a summer-only cottage drastically changes your lending options. Cottages on islands or isolated, rural locations are less appealing to lenders because if you default on your payment, it’s harder for them to resell the property. This includes cottages that don’t have electricity or running water, and aren’t easily accessible by road.

In these circumstances, it’s unlikely a bank will lend you the money, so you may have to turn to a private lender, Thake says. This means a larger down payment (closer to 20 per cent) and higher interest rates (six to nine per cent).

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What’s the cottage being used for?

Um…relaxing? This may seem like an odd question, but not everyone buys a cottage to lounge lakeside and take in the surrounding nature. Some buyers may be planning to rent the cottage out, or renovate the property and flip it. These both affect the type of mortgage you’ll need.

If you plan to rent out the cottage, you’ll need to secure a rental property mortgage. This, again, may require a private lender, as opposed to a bank, and typically means a down payment of at least 20 per cent. The interest rate on the mortgage will also be higher. Generally, expect between one to three per cent more interest points on a rental property mortgage than on a standard mortgage.

If you’re renovating the cottage, you should be able to secure a standard mortgage unless the cottage is uninhabitable. In this situation, you’ll need to apply for a construction mortgage or a private mortgage from a private lender, Thake says. This again means a down payment closer to 20 per cent as well as a higher interest rate than a standard mortgage. If you renovate the cottage to the point where it is habitable, you may be able to refinance your mortgage and apply for better terms through a standard mortgage with the bank.

Can you predict the mortgage’s rates and down payment?

Not ready to put in an offer until you know the terms of the mortgage? A broker can help with that. If you’ve settled on the type of property you’re interested in, Thake suggests sending your broker sample listings of desirable cottages.

They don’t have to be cottages you want to submit an offer on. They don’t even have to be cottages in the area you want to buy in, Thake says. But having samples will help your broker secure your mortgage faster when you’re ready to buy.

“It’s a lot easier to have that live property example where we can send it out to a dozen lenders and get some sample terms, like rates and down payment amounts,” Thake says. “That way, when the client does find the place they want, it’s kind of like a clone to what they’ve sent us as the sample.”

How do you finance the mortgage?

When buying a cottage, the down payment for the mortgage doesn’t have to come out of your savings. If you already have a mortgage on your house, you can borrow equity from that mortgage to help pay the down payment. Here’s how Thake explains it:

Say you bought a house for $500,000 and you’ve already paid off $250,000 of that mortgage. That $250,000 that you’ve paid is considered equity that you can borrow from if needed. If you’re buying a $500,000 cottage, you could refinance the mortgage on your house and borrow $100,000 of that $250,000 you’ve paid (you can borrow up to a max of 80 per cent of the property’s value). You can then use that $100,000 for your cottage down payment. Borrowing that $100,000 bumps your house mortgage back up to $350,000, but it brings your cottage mortgage down to $400,000 without depleting your savings.

This may sound complex, but there aren’t a lot of secrets to cottage mortgages, according to Thake. “We really just want to make sure there’s enough debt to cover this new mortgage,” he says, “and if they are looking to borrow the down payment from their existing home, that there’s enough income to carry that as well.”

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